Judge Ellen Segal Huvelle of Federal District Court for the District of Columbia said she would accept the $75 million settlement between the SEC and Citigroup, over the bank’s failure to adequately disclose its exposure to subprime mortgage debt in 2007.  The Judge had these conditions:

• The SEC will certify that the remedies Citigroup claimed to have put in place to prevent a similar failure were adequate and would remain for a given period of time.
• The settlement agreement be reworded to make clear that the $75 million would be used to compensate shareholders who suffered losses because of Citigroup’s misstatements - within 2 weeks.
• Citigroup must return with adequate assurances that the changes it has installed will make it unlikely that the problem will happen again. 

Judge Huvelle also asked why there were no senior managers of Citigroup named in the complaint - other than Citi's CFO and Investor Relations Director.  SEC and Citigroup lawyers argued that other senior managers were not involved in the decision whether or not to disclose the subprime exposure and didn't certify the federal filings that included the information.  The SEC brought administrative proceedings against Gary Crittenden (CFO) and Arthur Tildesley (IR Diretor) for their roles in the wrongful disclosures.  They agreed to pay $100K and $80K, respectively. 

The Judge futher noted that outside the $75mn fine, she saw “nothing [in the settlement] to address the flawed systems” that caused the company to so vastly misstate its subprime exposure.  None of the penalties were likely to prove to be an adequate deterrent.

“Seventy-five million dollars will not deter anyone from doing anything,” she said. Referring to the individual fines, “a $100,000 fine is not a deterrent in corporate America to do a better job.”

    Closing 'Statements' by Counsel for Citigroup.   Brad Karp sought to assure Judge Huvelle that his client, Citigroup, had significant incentive not to violate securities laws, given that it signed statements promising not to do so and noting that it has changed its entire senior management team since the events of 2007.  He added that because the evidence shows Citigroup had not intentionally concealed its subprime exposure, “Citi’s heart was in the right place.”  “Don’t overdo it,” Judge Huvelle warned, evoking laughter in the courtroom.  “I’ve never seen Citigroup’s heart. I’ve seen its building, but not its heart.”  The judge also rejected the idea that signed statements not to violate securities laws were of little value.  “They’re supposed to be obeying the law,” she said, “without writing it down.”   [NYT Dealbook, 9/24]