It is interesting to contemplate an entangled bank . . .and to reflect that these elaborately constructed forms, so different from each other. . .and dependent on each other in so complex a manner, have all been produced by laws acting around us.
— (With apologies to) Charles Darwin, On the Origin of the Species
It’s déjà vu all over again. Just the amounts and types of offenses have changed. It began July 21, 2015. That was the day the U.S. Consumer Financial Protection Bureau ordered Citigroup Inc’s consumer bank to pay $770 million to consumers because of the bank’s illegal credit card practices. As if that wasn’t enough to spoil Citigroup’s summer, on August 17, 2015 there was more bad news for the institution. That bad news relates to an Administrative proceeding brought by the Securities and Exchange Commission (SEC) against Citigroup Alternative Investments LLC (CAI) and Citigtroup Global Markets Inc. (CGMI). At the conclusion of that proceeding the two Citigroup entities (which for convenience we will refer to as Citigroup) agreed to pay $180 million in order to satisfy the SEC.
The first thing we must note in fairness to Citigroup is that although it agreed to pay $180 million, it didn’t admit it had done anything wrong. All it admitted was that the SEC had jurisdiction over the bank and “the subject matter of these proceedings.” In response to that admission the SEC could have issued a two-sentence order reciting Citigroup’s admissions and concluding that as a result, Citigroup had agreed to pay the SEC $180 million. Of course, not even a very big bank agrees to pay $180 million to the SEC just because the SEC has jurisdiction over the bank and the subject matter. The SEC knew that many people would wonder why the bank would pay so much if those were the only questions before it. Therefore, in order to explain why the bank agreed to pay that amount, the SEC wrote an eight page order in which it recited all the things Citigroup didn’t admit it had done. Here are a few of them..
It did not admit that it had raised “approximately $2.898 billion from approximately 4,000 investors” to invest in funds that were described by Citibank financial advisers as being suitable for traditional bond investors even though the marketing documents specifically said the funds “should not be viewed as a bond substitute.” Citigroup did not admit that it led investors to believe that the funds in which they were investing were better than the bonds Citigroup did not admit it encouraged investors to sell in order to generate funds to buy the securities Citigroup did not admit it was offering to those investors. Citigroup did not admit that it told investors that the investment it did not admit it was selling had “the same risk profile as a municipal bond investment but with a slightly higher return.” Citigroup did not admit it continued to misrepresent the quality of the investments it did not admit it was selling “even as the funds’ performance significantly declined and the risk of investor losses increased.” It did not admit that it failed to “adopt and implement policies and procedures to prevent misrepresentations made to investors. Other activities in which Citigroup did not admit engaging in can be found by reading the eight page Order that can be found on line.
At the conclusion of the eight-page recital of the things that Citigroup did not admit it had done was the Order of the SEC for Citigroup’s future reference in case it ever decided again not to do them. Paragraph A of Section IV tells CAI and CGMI to “cease and desist from committing or causing any violations and future violation” of the kind CAI and CGMI never admitted having done. Paragraph B is intended to make Citigroup feel bad. It simply says, “Respondents CAI and CGMI are censured.” Paragraph C is meant to be helpful. It tells Citigroup how to pay the $180 million. It says Citigroup can transmit payment electronically to the commission, can pay using Pay.gov or, lastly, by sending in a certified check, bank cashier’s check, or United States postal money order. It is not altogether clear why the government would not be willing to accept a plain old check since Citibank is very unlikely to send the SEC a check that would be returned for insufficient funds.
In addition to the fact that the Order spends eight pages describing what Citibank says it didn’t do, there is one other aspect of the Order that was commented on by a reporter for the New York Times. Gretchen Morgenson observed that the settlement document did not provide the names of any of the Citibank employees who were involved in doing the things Citibank did not admit it had done. Although the observation is accurate and the Order repeatedly refers to a “fund manager,” since Citigroup did not admit that any of the matters in which the fund manager was described as having participated took place, it probably made sense to the person writing the Order, that the fund manager remain anonymous. After all, he or she hadn’t done anything. Go figure.