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Flashback – Jan. 2011.

Keep in mind as you read that Citigroup was hiding – lying about – $40 billion of sub-prime exposure, and the CFO at the time, Gary Crittenden was fined a paltry $100k for his role in this blatant rape of federal securities law.

Khuzami who once promised to be a tough cop on the beat, allegedly broke protocol, held a secret meeting with his good friend – counsel for Citi – then instructed SEC staff to go easy on Crittenden and Arthur Tildesley, the lying curbskank at the helm of Citi investor relations.

The U.S. Securities and Exchange Commission’s internal watchdog is reviewing an allegation that Robert Khuzami, the agency’s top enforcement official, gave preferential treatment to Citigroup Inc. executives in the agency’s $75 million settlement with the firm in July.

  • Inspector General H. David Kotz opened the probe after a request from U.S. Senator Charles Grassley, an Iowa Republican, who forwarded an unsigned letter making the allegation.  Khuzami told his staff to soften claims against two executives after conferring with a lawyer representing the bank, according to the letter.

Citigroup agreed in July to pay $75 million to resolve SEC claims that the bank understated investments linked to subprime mortgages as the housing crisis unfolded.  Gary Crittenden, who stepped down as chief financial officer in 2009, and Arthur Tildesley, the New York-based bank’s former head of investor relations, agreed to pay $100,000 and $80,000, respectively, to resolve related claims.

The agency’s settlement was questioned in August by U.S. District Judge Ellen Huvelle, who eventually approved it. She asked SEC lawyers why the agency hadn’t pursued executives more aggressively.

  • “There has been nothing here that is being done to assure anyone that senior management who’s responsible, whatever level of culpability you’re talking about, is going to have any pain here,” Huvelle said.
  • According to the letter, the SEC’s staff was prepared to file fraud claims against both individuals. Khuzami ordered his staff to drop the claims after holding a “secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend” of his and “who was counsel for the company, not the individuals affected,” according to a copy of the letter reviewed by Bloomberg News.

Prince and Rubin

  • The agency also said in a filing that former Chief Executive Officer Charles O. “Chuck” Prince and former chairman Robert Rubin were among executives who knew 2007 losses were mounting on mortgage assets that Citigroup was faulted for not disclosing.

Continue reading at Bloomberg…

More detail from Columbia Journalism Review

Link – CJR

And American Lawyer got hold of the actual fax and notes that it “contains purported inside details about the SEC’s negotiations with Citi that suggest it wasn’t written by a random disgruntled Iowan, but by someone with knowledge of the SEC’s handling of the Citi case.”

Here’s the text of the fax, which is awfully specific and ought to be very easy to prove or disprove:

In the Citigroup investigation involving hiding/failing to disclose more than $50 billion of subprime securities from investors, the [SEC] staff had negotiated a settlement with one individual that included fraud charges and was prepared to file contested 10(b) fraud charges against another individual,” the fax states. “But just before the staff’s recommendation was presented to the commissioners, enforcement director Robert Khuzami had a secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend of Khuzami’s and a fellow former (Southern District of New York) alum, and who was counsel for the company.

American Lawyer helpfully points out who represented Citi in the SEC settlement talks and which of them also worked at the SDNY.

Citi was represented in the SEC case by Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison and Lawrence Pedowitz of Wachtell, Lipton, Rosen & Katz, among other lawyers from the two firms. John Carroll of Skadden, Arps, Slate, Meagher & Flom represented Crittenden. Tildesley had Simpson Thacher & Bartlett’s Mark Stein. Karp, who is not a former Manhattan federal prosecutor, declined to comment Tuesday; Pedowitz, Carroll, and Stein (who are all former SDNY assistant U.S. attorneys) didn’t return our calls.

Khuzami is a former prosecutor, but he’s also yet another in that line of Obama’s Wall Street-friendly appointments. Khuzami came over from the German giant Deutsche Bank. So this story also has a revolving-door angle. Yves Smith on that:

This is why prominent lawyers and other high level fixers earn as much as they do. They have ongoing personal relationships with influential figures and can pull strings when they need to. But how a seasoned and supposedly tough prosecutor like Khuzami ever thought this settlement would pass muster is beyond me. Did he really think no one would notice or care, that this was a sufficiently old matter that any objections to it would die down quickly?

Remember, Khuzami and the SEC settled with Goldman Sachs, too, despite having a good case against the firm. And it’s worth emphasizing that Khuzami, as the WSJ put it in a headline in April, “Oversaw Deutsche CDOs” before he jumped to the SEC:

Before taking his current job at the SEC last year, the 53-year-old Mr. Khuzami spent five years running the U.S. legal division of Deutsche Bank, one of the largest issuers of collateralized debt obligations in 2006 and 2007. As part of that job, he worked with lawyers who advised on the CDOs issued by the German bank and how details about them should be disclosed to investors. The group included more than 100 lawyers who also defended the bank against lawsuits and vetted other financial products, these people said.

Deutsche Bank has faced allegations of inadequate disclosure over its creation of CDOs.

Issa v. Khuzami:

Issa questions Khuzami about the Merrill Lynch/Bank of America bailout.

Further reading:

http://www.nytimes.com/2010/02/09/business/09sec.html