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Fraud flop

1 August 2012 By Reynolds Holding

A loser lawsuit against a Citigroup banker should send the U.S. Securities and Exchange Commission back to the drawing board. A federal jury cleared Brian Stoker of misleading CDO investors, while also urging the watchdog to bring more financial fraud charges. But quantity isn’t the issue. The SEC has filed over 100 crisis-related suits. What’s too often lacking, as with the Citi example, is a solid case.

No one may have wanted this trial more than the judge, Jed Rakoff. Last year, he bounced Citi’s $285 million settlement over the same hybrid CDO-squared, saying he couldn’t judge the deal’s fairness without an admission of wrongdoing. At the beginning of Stoker’s case, he bubbled about finally getting the chance “to find out what the truth is.”

As it turns out, there was probably no misconduct. Jurors rejected SEC charges that Stoker should have known offering materials he prepared didn’t disclose that the bank had helped pick the risky mortgage securities behind the collateralized debt obligation and then bet against it. In fact, Stoker argued, Ambac Financial Group and other investors were clearly told Citi might short the deal. Banks also typically help select at least some assets underlying a CDO.

In an unusual move, jurors included with their verdict a note encouraging the SEC to keep pursuing the financial industry. The surprising missive reflects public frustration over the failure to hold Wall Street accountable.

The SEC is aware of the sentiment. It has touted the $2.2 billion extracted so far from alleged fraudsters behind the crisis. That amount, though, comes largely from settlements with Bank of America and other institutions that never admitted wrongdoing. And the agency has been equally eager to publicize Florida pump-and-dump schemes and insider trading actions against sports stars.

So it’s understandable that the SEC would try to make hay with a high-profile trial against a banker. By overreaching, though, it has cost Stoker a small fortune in legal fees while leaving serious egg on the watchdog’s face. Pursuing miscreants more aggressively won’t help until the SEC gets smarter about the fights it picks.

 

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