Legal Briefing: Let's Call a Fraud a Fraud in Citigroup Settlement

Legal Briefing: Let's Call a Fraud a Fraud in Citigroup SettlementA daily look at legal news and the business of law:

Citigroup SEC Settlement Won't Boost Investors' Suits

Although the coverage of Citigroup's $75 million settlement with the Securities and Exchange Commission didn't use the word "fraud" -- indeed, the SEC's press release only speaks of "misleading investors" -- Citigroup (C) did indeed settle fraud charges. The Wall Street Journal reports that investors are wondering if the Citi settlement will help their fraud cases against the bank, and suggests that perhaps fraud isn't the right term to use. But whether or not Citigroup settled fraud charges isn't really the issue. It's what kind of fraud charge Citi settled. And the the type of fraud Citigroup admitted to doesn't help investors -- doesn't hurt them, but doesn't particularly help.

Section 17a of the Securities Act prohibits securities fraud. But just as crimes involving killing someone can range from first-degree murder to manslaughter, there are different levels of securities fraud, and the element that distinguishes them is the level of intent the accused must have had in order to be found guilty.

In the case of Section 17a(2), which is the type of fraud the SEC accused Citi of, all that's needed is to prove negligence. It's a manslaughter type of securities fraud -- the SEC doesn't need to show that Citigroup intentionally or even recklessly deceived investors, and to settle the case, Citigroup doesn't need to admit to doing so. This explains the language of the SEC press release and the resulting media coverage: We associate the word "fraud" with intent to deceive, while "misled investors" sounds less bad, more like negligence.

By contrast, Section 17a(1) prohibits intentional securities fraud -- the securities equivalent to a murder charge. For investors to win their suits, which must be filed under a different provision of the securities laws -- only the SEC can sue under Section 17a -- they must show more than negligence. Since Citi's settlement only involved Section 17a(2), it gives no aid to those investors, because they can't suggest the settlement essentially proves their own cases. But that doesn't mean the Citigroup charges didn't involve fraud. Indeed, as the The Wall Street Journal piece explains, bondholders are helped by the settlement, because in their cases, proof of negligence is enough.

Incidentally, the Goldman Sachs (GS) settlement also involved the whole of section 17a, and it was always clear the SEC thought Goldman was guilty of more than negligence. Moreover, Goldman's denial of wrongdoing was undermined by its admission that its marketing materials were incomplete: That was tantamount to an admission of negligent securities fraud -- that is, guilt under part 2 of the provision it settled.

Criminal Probe of Massey Energy Heats Up

The BP (BP) oil spill wasn't this spring's only deadly extraction industry catastrophe: The explosion at Massey Energy's (MEE) Upper Big Branch coal mine in West Virginia happened first and killed more people. Progress is apparently being made on holding people accountable for that disaster. The Justice Department investigation now involves a grand jury, which is investigating criminal charges related to disabling safety monitors, and whether the tampering was ordered by supervisors. Note to the grand jury: People only create a special term to refer to a practice when it's common enough to need a word to refer to it. In the mining industry, disabling a safety monitor is apparently called "bridging it out," a practice that Massey claims to be opposed to as a rule. According to The Wall Street Journal article, the criminal investigation is reaching up into management, something unusual given the current state of the law and past practices. But given which cops are on the beat in this case, I'm not surprised.

N.Y. Town Uses Google Earth to Catch Permit Violations

Riverhead, Long Island, may be trailblazing a path to additional revenue for cash-strapped towns: It's using Google Earth to figure out who put in pools without getting the necessary permits and paying the necessary fees. So far, Riverhead has netted $75,000, reports the Long Island Press. On the one hand, the Big Brother dimension is a little creepy. On the other, I'd appreciate my town making similar efforts to get the revenue it's already owed from residents before raising taxes or cutting services.

FTC Investigating POM Wonderful

In the face of the National Law Journal's appeal and an amicus brief by media groups, POM Wonderful requested the judge lift the restraining order blocking the publication of the name of the government agency investigating POM: It's the Federal Trade Commission. Now the question is why POM is being investigated.

And in the Business of Law ...

Judges don't entirely ignore professors' law review articles, reports the National Law Journal, although even after the advent of Lexis Nexis, Westlaw, etc. and the Internet, only some 6% of opinions cite the articles. And those opinions tend to be written by liberal courts, or by less-busy courts.

• Above the Law reports that the legal job market is looking better for 2011 -- more summer associates are getting offers. Of course, these summer associate classes are very small historically, so 100% rates of offer for them aren't exactly a sign of robust hiring.
Read Full Story

From Our Partners