A federal judge yesterday refused to immediately endorse a settlement between the U.S. and a bank for a third time in a year, calling a proposed $298 million fine of Barclays Plc for trading with Iran, Cuba and Sudan “a sweetheart deal.”
U.S. District Judge Emmet Sullivan in Washington approved the accord today following a second hearing in which he requested lawyers address the question he asked yesterday: “Why isn’t the government getting tough with the banks?” U.S. District Judge Ellen Huvelle in Washington Aug. 16 likewise held up a $75 million settlement between the Securities and Exchange Commission and Citigroup Inc., lawyers in the case said.
The scrutiny of civil and criminal penalties began last August with U.S. District Judge Jed S. Rakoff in Manhattan, who rejected the SEC’s proposed $33 million settlement with Bank of America Corp. over disclosures related to the purchase of Merrill Lynch & Co. In February, Rakoff approved a settlement of $150 million, saying he did so “reluctantly” and calling the accord “inadequate and misguided.”
“It’s very clear that Judge Rakoff’s ruling in Bank of America is resonating in their ears,” said John Coffee, a securities law professor at Columbia University in New York. “Judges often conducted a simple ritual and they blessed the decision. I don’t think there was searching inquiry. They are adjusting.”
‘Concerns the Court’
Barclays shares fell 2.35 pence to 324.75 in London trading. During yesterday’s hearing, Sullivan said the Barclays settlement “concerns the court.” Unlike the London-based firm, the average American caught robbing a bank doesn’t get deferred prosecution and the option of returning ill-gotten gains, he said.
Under a deferred-prosecution agreement filed in court Aug. 16, Barclays agreed to pay $149 million to the U.S. and another $149 million to New York state. Barclays was accused of violating U.S. financial sanctions against Cuba, Iran, Libya, Sudan and Burma from about March 1995 through September 2006.
Barclays is the U.K.’s second-biggest bank with 9.39 billion pounds ($14.8 billion) in net income last year.
A U.S. government lawyer, Frederick Reynolds, argued to Sullivan the settlement is fair and “in excess of what the company earned.” Michael O’Looney, a spokesman for Barclays Capital, declined to comment.
“Courts are wrestling with what they see as a disparity between the way in which the conduct is being characterized as serious and the penalties that are being imposed,” said James Doty, former SEC general counsel who is now a partner at Baker Botts LLP in Washington.
U.S. agencies and prosecutors, taking note of the decisions, will begin trying harder to deliver the executives responsible for misconduct, Doty said.
Rakoff had criticized the settlement with Charlotte, North Carolina-based Bank of America as penalizing shareholders for what was, “in effect if not in intent, a fraud by management” against them.
He said the bank failed to adequately disclose its agreement to pay Merrill executives and others $5.8 billion, or the fact that Merrill, which it was buying, was suffering losses of as much as $15.3 billion in the fourth quarter of 2008.
With Barclays, since the company profited by the actions, the shareholders shouldn’t be protected, Coffee said. The $298 million settlement seems to be fair as the bank probably took in a small fraction of that amount from the alleged conduct, he said.
“They may be over-reading it in some cases,” Coffee said. “Barclays is different.”
Huvelle said on Aug. 16 that she wasn’t satisfied with the written proposal on Citigroup and told attorneys to submit new court filings starting Sept. 8 and scheduled another hearing for Sept. 24, said Mathew Miller, an attorney for a Citigroup shareholder. Shannon Bell, a Citigroup spokeswoman, said the bank “will answer all the judge’s questions concerning this matter.”
SEC spokesman Kevin Callahan said the agency “will provide the court with additional information requested.”
The bank made misstatements on earnings calls and in financial filings about assets tied to subprime loans as the housing crisis unfolded in 2007, the SEC said July 29 in a complaint filed in federal court in Washington. Some disclosures omitted more than $40 billion in investments, the SEC said.
Former Chief Financial Officer Gary Crittenden, who left New York-based Citigroup last year, agreed to pay $100,000 to settle claims he didn’t disclose the risk after getting internal briefings. Arthur Tildesley, Citigroup’s former head of investor relations, will pay $80,000 to settle claims that he helped draft disclosures that misled investors, the SEC said. Tildesley now heads cross-marketing at Citigroup, according to the agency.
Citigroup, Crittenden and Tildesley agreed to settle the case without admitting or denying the SEC’s allegations. Citigroup rose 2 cents to $3.87 at 1:30 p.m. in New York Stock Exchange trading.
Judges have almost always rubber-stamped settlements in the past, said David Irwin, a former federal prosecutor in private practice in Towson, Maryland. As distrust of Wall Street grows after the deepest financial crisis since the Great Depression, they will be more vigilant “watchdogs,” he said.
“It’s a new world,” he said. “With loans, the SEC, the Fed, it’s a new world in the corporate board room.”
The cases are U.S. v. Barclays Bank Plc, 10-cr-218, and Securities and Exchange Commission v. Citigroup Inc., 10cv1277, U.S. District Court, District of Columbia (Washington).