Last month the SEC slapped Citigroup on the hand for misleading its shareholders—and everyone else—in 2007 about its subprime exposure. Slapped on the hand is too strong, actually. It more grazed it or tapped it than anything.

I wrote then:

Again, Citi misled its shareholders—and everybody else—about $43 billion worth of subprime securities. And its CFO and investor relations guy get slapped with a combined $180,000 fine and the SEC says, somehow, that it wasn’t an intentional mistake.

The CFO alone made $13 million that year. Cough.

The SEC’s headline number was a $75 million fine for Citi, which works out to about 0.05 percent of the company’s 2007 revenue (Citi is a CJR funder) or below 5 percent of its 2007 profits. And the shareholders—the ones who got misled—are the ones that have to pay it (Yes, most of Citi’s shares have probably churned since then, but the point stands).

Now, a federal judge is playing Jed Rakoff and declining to approve the SEC/Citi settlement:

The judge, striking a frustrated tone, fired several questions at the SEC, among them why it pursued only two individuals in the case and why Citigroup shareholders should have to pay for the alleged sins of bank executives.

That’s The Wall Street Journal there, which gives this story good play on C1. The New York Times, for some reason, decides to outsource its coverage to Bloomberg and stuff a brief inside Business Day. Boo.

Here’s what the WSJ says about the whole fining-shareholders-for-getting-misled thing:

The SEC has debated corporate fines for years. Democrats on the commission say they are the best way to deter others, while Republican commissioners have expressed concern about the double hit to shareholders.

You know what would really deter others? Clawing back all their pay or hauling them off in cuffs (the latter of which, admittedly, the SEC can’t do). A dinky fine diluted by hundreds of thousands of shareholders isn’t going to do it.

The judge here, Ellen Segal Huvelle, is on that track:

The judge asked why Messrs. Crittenden and Tildesley were charged but no other executive who knew about the bank’s exposure, although the SEC’s complaint referred to other senior officers at the bank. She cited concerns that senior executives who enjoyed big compensation wouldn’t be sharing in the $75 million bill.

“You’ve focused on two individuals and I can’t for the life of me figure out why,” the judge told the SEC lawyers.

The Washington Post is good to delve further into the parallels with the Rakoff/Bank of America case (emphasis mine):

In rejecting the SEC’s initial $33 million Bank of America settlement, U.S. District Judge Jed S. Rakoff of the Southern District of New York was incredulous about the agreement. He said it suggested “a rather cynical relationship between the parties” in which the SEC would get to say it was penalizing a big bank and Bank of America could avoid a protracted fight with one of its regulators.

Ultimately, after the SEC quintupled the fine and added new charges, Rakoff offered his half-hearted approval to the settlement.

Last month, the SEC charged Citigroup with misleading investors about nearly $40 billion of subprime mortgage investments in its portfolio in 2007. Those investments blew a gaping hole in the bank’s balance sheet and led the federal government to provide tens of billions of dollars in financial aid to keep the bank afloat.

You have to wonder if the SEC will negotiate penny-ante settlements with Lehman execs like Dick Fuld and Erin Callan. Fox Business’s Charlie Gasparino is reporting that charges seem imminent.

The New York Post has this to say about the Lehman investigation coming to a head:

Regulators have a keen eye on Fuld, along with the firm’s former financial officers, including Erin Callan, Ian Lowitt and Chris O’Meara, sources said. Former Lehman President Joseph Gregory and possibly the firm’s chief legal officer Tom Russo are also being eyed, sources added.


Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.