Brian Stoker, the former Citigroup Inc. executive, was essential to a scheme to defraud investors in a collateralized debt obligation, a U.S. Securities and Exchange Commission lawyer told jurors at the close of a civil trial.
Jeffrey Infelise, an attorney for the SEC, said today in federal court in Manhattan that Stoker committed securities fraud that can’t be blamed just on the bank.
“If Citigroup stacked the deck, Mr. Stoker built the cards,” Infelise said. “He was essential. He was in the middle of this. They could not have done this without him.”
The SEC accused Stoker, a former head of the Citigroup CDO structuring group, of negligently violating securities law in putting together the assets in “Class V Funding III,” a $1 billion CDO. The government claims Citigroup withheld information from investors about the bank’s interest in the assets.
Infelise said Citigroup hand-picked assets that the bank expected to perform poorly, and then bought protection for them to ensure the bank would make money. Stoker omitted the bank’s connection to the transaction from packages sent to potential investors, Infelise said.
“Doing nothing when you’re working on disclosures to investors in a billion-dollar CDO is not reasonable,” he said.
Stoker’s attorney, John Keker, accused Infelise of acting like a “rabid dog,” saying the SEC’s case reminded him of the children’s book series “Where’s Waldo?” U.S. District Judge Jed S. Rakoff later scolded Keker with the jury out of the courtroom and said he was in danger of being found in contempt of court.
When the jury was present, Keker argued that the investors were sophisticated enough to understand that sometimes the bank behind the deal also has a stake in the fund.
“I’m not suggesting for a second that you can lie to anyone, but these investors were not misled,” Keker said. “They were given everything they wanted.”
“Most of this trial had nothing to do with Brian Stoker,” Keker said. “The SEC has created a false world that simply ignores what the evidence is.”
Rakoff, who kept the lawyers in the courtroom after jurors went to lunch, said he was “deeply concerned with the tone and manner of defense counsel’s summation.”
“You’re playing with fire,” Rakoff told Keker, saying the defense attorney began with “a personalized attack on the SEC counsel” that “was blatantly untrue in this court’s observation.”
Rakoff added, “There were a bunch of other improprieties,” and warned Keker he would be held in contempt of court if he continued to make such arguments. Rakoff cited the lawyer’s references to the jury-selection process and said he had made a “blatant appeal to prejudice against the SEC.”
The judge gave the SEC lawyers an additional 15 minutes this afternoon for rebuttal partly because of the defense’s tone earlier. He commended Keker for how he presented afternoon arguments.
Keker emphasized for the jury this afternoon that he saw no evidence indicating it was common practice to put information about the bank’s interests in the offering memorandums sent to potential investors.
“Look at how many people didn’t raise this question,” Keker said. “No offering memorandum ever in this industry contains that information.”
Infelise responded in his rebuttal, telling the jury: “Just because this might be the first time this was ever done doesn’t mean it’s not a violation of securities law.”
After being instructed by the judge, jurors deliberated for about two hours before they were sent home. Deliberations are scheduled to resume tomorrow.
The case is U.S. Securities and Exchange Commission v. Stoker, 11-cv-7388, U.S. District Court, Southern District of New York (Manhattan).