The Citigroup Decision: The Director of the Division of Enforcement Responds

What is the Commission's reaction to the Citigroup decision?  There has been no official response.  Nonetheless, Robert Khuzami, the Director of the Division of Enforcement, gave a talk before the Consumer Federation of America's Financial Services Conference on December 1.  The entire talk is here and is worth a read. 

For now, we focus on his discussion of the "commentary" on the “neither admit nor deny” policy.  First, he had this to say about settlements. 

• When the Division of Enforcement recommends that the Commission settle a case, it is because our informed judgment tells us that what we are obtaining in settlement is within the range of outcomes we reasonably can expect to get after we prevail at trial, taking into account the strength of the case as well as the delay and resources required for a trial and the benefits of returning money to harmed investors quickly – not to mention the chances that we might lose at trial, or win but be awarded less than what the settlement achieves.

Refusing to approve such a settlement was in his view an "unwise policy."  As for the purported fear of going to trial, Khuzami noted that the Division was not "reluctant to try cases."  Cases were settled for "the right reasons."  To believe otherwise, he noted, it would be necessary to believe:

• That we established and funded an entirely new specialized unit directed solely at investigating fraud related to structured and mortgage-related products that gave rise to the credit crisis … that we staffed that unit with dedicated and talented SEC staffers, some of whom have spent their careers in public service, and all of whom are committed to uncovering fraud in these markets and transactions … we hired private sector experts with market experience to cut through the jargon and the complexities and help us zero in on the possible areas of misconduct … we set up extensive training programs to teach these staffers the complexities of structured products and the markets in which we operate; the staff then went out and spent years pouring over millions of pages of documents, e-mails and 500-page prospectuses and indentures and flow charts to find evidence of fraud … then spent months and years in conference rooms questioning witnesses about these transactions in painstaking detail … and then we put together our case, charging both the company and the persons who were responsible for the deal.

Given that the SEC was going forward with a trial against the individual charged, the idea "that we nonetheless intentionally settle the case against the company on the cheap because we just don’t like to try cases, or for other, even more ridiculous reasons" reflected a "fundamental misunderstanding about the professionalism and commitment of the SEC staff".

Khuzami's discussion reflects the complex considerations that go into settlements and the use the "neither admit nor deny" approach.  The discussion demonstrates why implementation ought to be left to the Agency and the parties and not be a matter of judicial fiat.