By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Citigroup’s $285 million settlement with the Securities and Exchange Commission looks ripe for the Rakoff treatment. Judge Jed already has established a reputation for taking the regulator to task for sometimes being too soft. Two years ago, for example, he upbraided it for having too light a touch on Bank of America’s lax disclosures related to its takeover of Merrill Lynch. This Citi case warrants a similar hearing.
The deal looks straightforward enough. The SEC accused Citi of defrauding investors in a hybrid CDO-squared backed by mortgage assets that it put together for Credit Suisse Asset Management in 2007. The security soon cratered. Citi, argues the regulator, failed to inform investors either that it played a big role in selecting many of the assets in the CDO or that it took a $500 million short position.
Citi ended up making $160 million on the deal. So for the bank to pay some 80 percent more than that in both a penalty and disgorgement of profits sounds like good, old-fashioned tough justice. And without any basis for comparison, it just might be.
But Goldman Sachs went first. On the face of it, Citi’s purported transgression looks worse by comparison. Goldman’s alleged offense in structuring the infamous Abacus CDO was not telling buyers that a hedge fund, Paulson & Co, was both selecting some of the assets as well as shorting the deal. But Citi itself, according to the SEC, actively sought to profit from the demise of its deal. Yet Citi’s overall penalty comes in at about half of Goldman’s.
The distinction arguably shouldn’t matter. Any investor taking the long position in an esoteric derivative in 2007 ought to have known the product could only exist because investors with a dim view of the housing market were snapping up the other side. That put the onus on buyers to beware.
It’s the SEC’s judgment that now seems skewed. Actively betting against clients, which new rules seek to outlaw, would appear to outrank what Goldman is supposed to have done. The agency may have judged the intentions of the two banks differently, or perhaps took Citi’s gargantuan CDO losses elsewhere into account. That’s not clear from what’s been disclosed so far. For now, it looks like the SEC let Citi off lightly or overdid it with Goldman. Either way, it sounds like a situation well suited to Rakoff’s skeptical eye.
Finance ministers and central bank governors of the world’s
20 biggest developing and developed economies will also welcome
the euro zone’s plans to address its sovereign debt crisis
announced earlier this week.The G20 will note however, they expect a summit of euro zone
leaders on Oct. 23 to agree on leveraging of the single currency
area’s bailout fund to maximise its firepower and help dispel
market concerns by making it big enough to protect Italy and
Spain.”In particular we welcome the adoption of the ambitious
reform of the European economic governance and the completion by
the euro area countries of the actions necessary to implement
the decisions taken by the Euro Area leaders on 21 July 2011 to
increase the capacity and the flexibility of the EFSF,” the
draft communique said.”We look forward to further work to maximize the impact of
the EFSF in order to address contagion, and to the outcome of
the European Council on October 23,” it said.
By Jim Finkle and Sarah N. LynchBOSTON/WASHINGTON, Oct 13 (Reuters) - U.S. securities
regulators formally asked public companies for the first time
to disclose cyber attacks against them, following a rash of
high-profile Internet crimes.The Securities and Exchange Commission issued guidelines on
Thursday that laid out the kind of information companies should
disclose, such as cyber events that could lead to financial
losses.Senator John Rockefeller had asked the SEC to issue
guidelines amid concern that it was becoming hard for investors
to assess security risks if companies failed to mention data
breaches in their public filings.”Intellectual property worth billions of dollars has been
stolen by cyber criminals, and investors have been kept
completely in the dark. This guidance changes everything,”
Rockefeller said in a statement.”It will allow the market to evaluate companies in part
based on their ability to keep their networks secure. We want
an informed market and informed consumers, and this is how we
do it,” Rockefeller said in a statement.There is a growing sense of urgency about cyber security
following breaches at Google Inc , Lockheed Martin Corp , the Pentagon’s No. 1 supplier, Citigroup , the
International Monetary Fund and others.Tom Kellermann, chief technology officer of security firm
AirPatrol Corp, said that the SEC guidance tells companies to
report cyber attacks and disclose steps to remediate problems.”They must also incorporate cyber events into their
material risk reports,” said Kellermann, who has advised U.S.
President Obama on cyber policy.The SEC gets into specifics, telling companies what type of
data they might need to provide investors.”Examples of estimates that may be affected by cyber
incidents include estimates of warranty liability, allowances
for product returns, capitalized software costs, inventory,
litigation, and deferred revenue,” it says.(The document can be accessed on the SEC’s website:
www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm )A report out earlier this month found that U.S. banks are
losing ground in the battle to combat credit and debit card
fraud because they balk at the expense of higher security.
Globally, however, security is improving in the payment
industry, according to data from The Nilson Report, a
California trade publication.There is some hope of U.S. legislation to address the
problem, although the House of Representatives appears more
interested in tackling it piecemeal while the Senate is opting
for a more far-reaching approach.Most of the concern has been focused on critical facilities
like nuclear power, electricity, chemical and water treatment
plants.
