S.E.C. Inertia on Paybacks Adds to Investor Harm
New York Times
In August 2015, the S.E.C. struck a settlement with Citigroup over an exotic investment strategy involving municipal bonds that the bank sold to clients from 2002 to 2008.
When securities laws are broken and investors get hurt, the Securities and Exchange Commission often rides to the rescue, using its regulatory muscle to extract penalties that can be returned to victims.
But as a cadre of harmed Citigroup investors is learning, it is one thing to persuade a wrongdoer to pay reparations and quite another to disburse the money.
This particular matter dates to August 2015, when the S.E.C. struck a settlement with Citigroup over an exotic investment strategy involving municipal bonds that the bank sold to clients from 2002 to 2008.
Contending that Citigroup had misrepresented the investments’ risks, the S.E.C. ordered the creation of a so-called fair fund to be distributed to investors. Citigroup neither admitted nor denied the allegations but agreed to pay $180 million into the fund.
That was over 16 months ago. Today, the wronged investors are not only still awaiting their money, but they have yet to see any plan outlining how the $180 million will be distributed, the S.E.C.’s website shows.
Receiving reparations in cases like these is a multistep process that the S.E.C. details on the site. Typically, restitution funds sit in an account at the United States Treasury. Disbursement is generally overseen by outside entities appointed by the S.E.C.; their fees are paid by the institution providing the funds.
Fair funds were established by the Sarbanes-Oxley Act of 2002; they allow the S.E.C. to exact civil penalties in addition to recovering ill-gotten gains, a process known as disgorgement.
The S.E.C. website shows that the Citigroup case is one of roughly 80 fair fund and disgorgement plans currently operating. Another 60 or so plans have been terminated; this means they have finished distributing the money to investors. Any amounts left over go to the Treasury or an S.E.C. investor protection fund.
Patience is required of those going through the process, the S.E.C. warns. “The process for distributing the money to harmed investors may take a long time,” it noted on its site.
But the pace of the Citigroup restitution plan seems especially glacial. And it raises questions about how these plans are administered and whether those overseeing them are rewarded for slowing down the process.
At the time of the settlement, the S.E.C. said a plan of distribution to harmed investors would be submitted “within 120 days of payment in full” by Citigroup. That payment was made in August 2015, a bank spokeswoman said.
And yet, 500 days later, there’s still no plan of distribution.
I asked the S.E.C. what was causing the holdup. Judith Burns, a spokeswoman, declined to comment.
Keep in mind: It has been almost nine years since the Citigroup investors incurred their losses when the municipal bond strategy collapsed in 2008. Advertised as a safe-money bet to some 4,000 clients who invested $3 billion, the strategy wound up losing between one-half and three-quarters of some customers’ account values. Seven years later came the settlement and the S.E.C. order to create the $180 million fund.
Lawyers for the aggrieved investors say they are losing patience. “To me, it comes down to a bureaucratic quagmire of indifference and concealment,” said Steven B. Caruso, a lawyer at Maddox Hargett & Caruso in New York City. “There is simply no transparency in this process, and no effort being made by the S.E.C. to recognize that these are funds that belong to other people.”
Because many of the investors are subject to confidentiality agreements, they were wary about discussing their concerns.
A bit of activity occurred in the case last April, when the S.E.C. said it had appointed a plan administrator for the fund. It was Garden City Group, a provider of legal administrative services that is a unit of Atlanta-based Crawford & Company.
Then more silence.
Of course, it isn’t simple returning money to wronged investors. Determining who deserves how much of a settlement’s proceeds, and locating those people, is complicated. Needless to say, recovering some losses, even if it’s pennies on the dollar and many years later, is better than never receiving a thing.
But the S.E.C. trumpets its role in getting money back to harmed investors. In its most recent annual report, for example, the agency said, “Hundreds of billions of dollars were returned to harmed investors as a result of our aggressive enforcement program.”
A review of the S.E.C. website shows that the timelines for these fund distributions can be long indeed. For example, in 2007, the S.E.C. settled an enforcement case with a mutual fund company and ordered the creation of a $40 million fund approved for distribution to wronged investors. That fund was approved in July 2015; the improprieties at the mutual fund company had occurred from September 2001 to October 2003, the S.E.C. said.
Even relatively simple cases seem to be a slog. Consider a municipal bond, pay-to-play case involving J.P. Morgan Securities and Jefferson County, Ala. In early November 2009, the bank settled with the S.E.C., without admitting or denying the allegations, and paid a $25 million penalty. A fair fund was set up to dispense the money to the county; the plan was approved in early October 2010 and disbursements went out in February 2011.
Even though the case involved just one recipient, it took 15 months from start to finish.
I asked the S.E.C. how long each fair fund process takes, and got a partial answer.
In fiscal 2015, the most recent data available, the agency said 96 percent of fair funds and disgorgement plans had distributed 80 percent of their money within two years of a plan’s approval. That was a significant improvement over the previous year, when only 80 percent of funds had done so.
But these figures don’t take into account the time between an S.E.C. settlement and a plan’s approval, which can be many years. In the $40 million mutual fund case dating to 2001, for example, it took eight years for the fund to be approved.
Mr. Caruso said he had tried repeatedly to get answers about what was happening with the fund. At first, the S.E.C. told him it was waiting to get the list of investors from Citigroup. Then, an agency official suggested he try Garden City Group, which he did.
“Every time I would call, somebody else would call me back to say, ‘We really don’t have a timetable, and we don’t have a lot of information,’” Mr. Caruso recalled.
I asked Stephen Cirami, chief operating officer of Garden City Group, about the status of the fund. He did not return my voice mail message or email.
I had hoped to learn how Garden City Group gets paid for its services. For example, is it incentivized to move quickly in distributing the funds, or is it paid more the longer the process takes?
It is Citigroup, not the investors, paying these costs. But an inefficient process means investors are hurt twice.
“That $180 million should be back in people’s pockets, not sitting in some account somewhere,” Mr. Caruso said. “The bottom line is, there’s no accountability.”