In the recent, highly-publicized securities fraud case, SEC v Citigroup Global Markets, the Court rejected the settlement proposed by the parties because the public interest would not be served.
Although it is not an FCPA case, it is noteworthy for two reasons.
First, the Court’s opinion did not mention Citigroup’s compliance and ethics program ( “CEP”), although as a distinguished observer remarked, in FCPA practice prosecutions and settlements typically review the CPE. (See the November 29, 2011 letter from Win Swenson, former deputy general counsel of the United States Sentencing Commission (1991-1996) in the New York Times here.)
Second, the opinion has several indications that the company violated its CEP responsibilities by allowing an unethical business culture to go unchecked. According to the complaint, a billion dollar fund of defective mortgage-backed securities was dumped on intentionally misinformed investors with damaging consequences for the national economy.
The Court described Citigroup as a “recidivist” offender willing to incur a fine equivalent to “pocket change” as a cost of doing business and as a way to smooth future dealings with its regulatory agency. Sending the case for trial, the Court stated that when a case “touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.”
It is unethical conduct, prohibited by a CEP, for a company to create a defective product that is as close as possible to the legal line and whose illegality would be difficult to prove and prosecute. A company may have complied with the law, but violated its CEP obligations to deter and prevent unethical conduct.
The operation of Citigroup’s CEP could be considered post-conviction during sentencing under the federal guidelines. If applicable, the Court could set a useful precedent by applying sanctions specifically for unethical conduct prohibited by a CEP.
Michael Scher has over thirty years experience as senior in-house counsel for anti-fraud and money laundering, regulatory compliance, international transactions and litigation management for financial or aerospace companies based in New York and the Middle East. He consults and provides training on the FCPA and related laws. He can be contacted here.
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