How to Make a Cool $160 Million Through Deceptive Marketing

(U.S. Securities and Exchange Commission v. Citigroup Global Markets, Inc.)

Step 1:  Create a billion dollar fund by unloading assets you own that are soon to be (or are) worthless.
Step 2:  Convince prospective clients that the fund’s assets are really a great investment.
Step 3:  Take a short position in those very assets you just got your clients to invest in.
Result:  Net profits of about $160 million for you.  Woohoo!!!  Your clients?  Oh, well they lost about $700 million.

What do you do if you get caught?  Try and settle with the SEC (who doesn’t appear to be concerned about protecting the public’s interest anyway) so you can get out on the cheap ($285 million), and you won’t even have to admit that you did anything wrong.

That’s what Citigroup did in November 2011.  The only problem was that Jed Rakoff, United States District Judge for the Southern District of New York, wasn’t buying it.  In a 15-page rejection of the SEC/Citigroup settlement, the Court wrote:

It is hard to discern from the limited information before the Court what the S.E.C. is getting from this settlement other than a quick headline.  By the S.E.C.’s own account, Citigroup is a recidivist, …, and yet, in terms of deterrence, the $95 million civil penalty that the Consent Judgment proposes is pocket change to any entity as large as Citigroup.  While the S.E.C. claims that it is devoted, not just to the protection of investors but also to helping them recover their losses, the proposed Consent Judgment, in the form submitted to the Court, does not commit the S.E.C. to returning any of the total $285 million obtained from Citigroup to the defrauded investors but only suggests that the S.E.C. “may” do so.

The Court’s final thoughts on the matter are worth noting:

In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers.  Even in our nation, apologists for suppressing or obscuring the truth may always be found.  But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.