What was should have been an open and shut case against a mid-level executive with Citibank over the banks’s sale of risky collateralized debt obligations (CDO) somehow was lost by Security and Exchange Commission lawyers.
The Securities and Exchange Commission had accused Brian Stoker, a former midlevel Citigroup executive, with negligence related to his role in creating exotic mortgage securities known as collateralized debt obligations, or C.D.O.’s. In a lawsuit filed last October, the government said that Mr. Stoker, who prepared sales materials for C.D.O.’s, knew or should have known that he was misleading investors by not disclosing that Citigroup helped select the underlying mortgage securities in the C.D.O. and then placed a large bet against it.
The jury rejected the S.E.C.’s case, concluding that Mr. Stoker was not liable under the securities laws. In addition to handing up its verdict, the jury also issued an unusual statement.
“This verdict should not deter the S.E.C. from investigating the financial industry, to review current regulations and modify existing regulations as necessary,” said the jury’s statement, which was read aloud in the courtroom by Judge Jed S. Rakoff, who presided over the two-week trial in Federal District Court in Manhattan.
Citibank has already entered an agreement to pay $285 million to settle a civil suit filed by the SEC about the CDO’s. As part of the agreement, Citibank would not have to admit to any wrong doing. Judge Rakoff has rejected that deal and told the parties to prepare for a trial. That ruling is being appealed.
Mr. Stoker’s lawyer depicted him as a “scapregoat” who was merely doing what he was told. Stoker knew full well that the CDO’s were very risky but failed to warn investors who lost over a billion dollars, but he was following instruction from the higher ups. Seriously? The Nuremberg defense is now acceptable?
As Yves Smith observes the SEC showed abject incompetence in prosecuting Stoker:
The SEC’s performance in the case at issue, SEC v. Stoker, was such a total fail that the odds are high that any motivated member of the top half of the NC readership would have done a better job of arguing this case pro se than the SEC did. Even though this case was argued before a jury (ooh, scary! They might go into My Eyes Glaze Over mode on CDO details), the basic issues were simple. The CDO squared that Citigroup director Brian Stoker marketed to investors was presented as having its assets selected by an independent asset manager. This is crucial. Just as investors in mutual funds understand they are hiring a fund management firm, and they compete on track records, so to were managed CDOs sold on the notion that the managers were serving the interests of the investors. And this is particularly important for CDOs, since the fact that the final asset list is made available shortly before closing makes it pretty much impossible for investors to evaluate a CDO on their own even if they had the skills and motivation. [..]
So what did the SEC’s strategy appear to be? This seems to have been a parallel to the approach in the Goldman suit against Goldman’s Fabrice Tourre: to target an non-executive and get him to roll the higher ups. But Tourre and Stoker were both enough made men to be willing to fight. Stoker had a $2.2 million guarantee for 2007. Guys like that do not want to lose their access to the industry meal ticket.
So what was Stoker’s defense? That he was being scapegoated, and Citi should really be on trial. Huh? In prosecutions, whether other parties are being charged is irrelevant. The question at hand is: did the party on trial engage in the conduct in question or not? Saying, “I was only the car driver in the robbery, I didn’t enter the convenience store” does not get you off of being an accessory to a crime. It’s pretty bloomin’ obvious that Stoker misrepresented the deal to investors. He had held securities industry licenses; he knew what the standards were.
It’s fairly obvious from day one of this entire case against Citibank that the SEC was trying very hard to let them off the hook. It is past time that the SEC was staffed with people who are more willing to regulate the banks and up hold the law. I have some heavy doubts that will ever happen under this administration or any other, now or in the future.