Cuomo Takes Action Against Citigroup, as ABCP Buyers Wait in Vain

There are many things to admire about the United States, but one of them certainly is the swiftness with which certain questionable commercial activities find themselves under the regulatory microscope. And, in full view of the public.

In part, this is due to the legions of public office holders and state regulatory bodies that exist south of our border. As well, though, the tolerance for mistakes and/or stupidity is lower in a sense. Although the U.S.A. might be the land of the second chance, you’ll still get a swift kick if you screw up the first one.

That’s why the U.S. justice system ensures that each and every accused white-collar criminal does the perp walk. Martha Stewart, Frank Quattrone, Conrad Black, Andrew Fastow, Jeffrey Skilling, the Koz’, etc. You’ve yet to see that in Canada.

This came to mind yesterday with the news that New York State Attorney General Andrew Cuomo said he intends to bring legal action against Citigroup Inc. (C:NYSE) over its marketing and sales of auction-rate securities. This from the Wall Street Journal:

In a letter Friday, Mr. Cuomo’s office indicated it intended to sue Citigroup Global Markets Inc. and Smith Barney under the state’s Martin Act for fraudulent marketing of the securities and for destruction of documents under subpoena.

Mr. Cuomo’s office said a five-month probe found that Citigroup “repeatedly and persistently” made material misrepresentations and omissions in its underwriting, distribution and sale of auction rate securities.

“Citigroup represented that auction-rate securities were safe, liquid, and cash-equivalent securities,” wrote David A. Markowitz, chief of Mr. Cuomo’s Investor Protection Unit. “These representations were false, and had a severe detrimental impact on tens of thousands of Citigroup customers.”

The parallels to the 2007 asset-backed commercial paper scandal here at home are clear. According to many retail and corporate investors, ABCP was marketed as being safe, liquid and equivalent to BAs, with a few extra basis points thrown in. This doesn’t sound any different than the auction rate securities situation.

As one NYSE-listed corporate executive recently told me, a Canadian bank dealer money market institutional salesman that the ABCP assets would be available the next day when they went to cash them in assured his treasury team. That turned out to be anything but true.

In the State of New York, Mr. Cuomo believes that warrants a court action. In Canada, the powers that be support indemnities for the intermediaries. This is as stark a difference as could exist.

That’s code for only one thing: Despite the fact that each province has a Department of Consumer Affairs that is charged with protecting the public from fraudulent product marketing, Canada will never see an ABCP perp walk What’s more, we hear a great deal from some quarters about the need for each Province to have their own local securities regulator. They’ve got the power to look into the marketing of ABCP, as does the federal OFSI Superintendent. It has never happened, and power unused is power lost.

I have an idea. If none of the 25 or so Canadian agencies who could have initiated an ABCP investigation wants to use their statutory power, let’s put the Toronto Parking Authority in charge of it. They are swift-of-foot, genius business people, and they usually get their man/woman. They know their Code and they follow it with a relish we’d love to see in our regulatory and consumer protection agencies.

They’d even probably bring the perp walk to Canada.

 

Comments

[keen observer:]

Martha Stewart has no relevance to this article. Ms. Stewart made a perfectly legal inconsequential PERSONAL stock sale that had nothing to do with her namesake company or her corporate position - there was no job or company connection.

The political persecution of Ms. Stewart was a colossal waste of taxpayer resources.

In her magnificient triumph over evil, Martha Stewart symbolizes today the powerful message of deterrence against the wrongful abuse and misuse of the criminal justice system for political gain.

2008 Aug 03 10:16 AM

[Ishortyou:]

Crooks have wrapped up with fraud CDO-ABS-MBS-SIVs also called structured finance vehicles, most of these wraps come from Banks and Broker Firms (Citi, Merrill, Indymac, etc.), they misled the market and bond insurers into this fraud and this is not fair!

2008 Aug 03 10:41 AM

[sf94127:]

The gov't does almost nothing about the theft of hundreds of billions from the small investor through stock manipulation by hedge funds.
The trading of major equities and commoditie smostly has nothing to do with fundamentals anymore. I don't know if there is a case here against C; I know there are bigger issues the SEC and DOJ totally ignore.

2008 Aug 03 02:49 PM

[MutantCapit...:]

The name of this scheme is 'milk the CDO' - ABS, MBS, REMICs, ReREMICs, REITs - consumer, investor, taxpayer alike. Hide over leveraged CDS losses in arcane sounding off balance sheet conduits - VIEs, SPVs, SPEs, SIVs that rarely if ever see daylight, then aggressively foist CDO wreckage from MSF (Mortgage Servicing Fraud) onto unsuspecting private investors in ARS fraud. SWEET !!!

2008 Aug 03 04:37 PM

[banval:]

In Canada, what happened was much closer to fraud than anything in the US. Deutsche Bank and DBRS invented the leveraged super senior trade which was based on credit derivatives and rated for the Canadian Conduit market. Because it was worth much less than 100% day 1, the investors were ripped off from the start. They relied on an explicit liquidity put to prevent them from losing their money, however, if they had looked closely at the language they would have realized that Deutsche never had to deliver on it. It was based on technical wording that required the entire Canadian Banking system to be failing before the liquidity put was triggered. At least all the SIV/CDO/ARS paper in the US was worth par when it was sold, and they may have had varying degrees of liquidity protection, but the US agencies never rated that component. Without DBRS, Deutsche could never have crushed the Canadian pension the way it did..those Canadian pensioners now own $12billion of worthless paper....

2008 Aug 03 06:05 PM

[contrariwise:]

"As one NYSE-listed corporate executive recently told me, a Canadian bank dealer money market institutional salesman that the ABCP assets would be available the next day when they went to cash them in assured his treasury team."

This sentence is incoherent. What did you mean to say?

2008 Aug 03 06:21 PM

[Augustus:]

keen observer,
Your comments on the Martha Stewart affair are very correct. I'm not a fan of Martha. The charges and conviction were a real sham. I'll never talk to any law enforcement official, ever.

traffic stop:
Policeman: "Do you know why I stopped you?"
Me: "No"
I get double charged because the spedometer was correct in showing 75 in a 55 zone and I knew it.

2008 Aug 03 10:55 PM

[Augustus:]

In Re: charging managers for crimes

The charges against the two Bear Sterns guys are just as bogus as the Martha Stewart charges. The guys were funning funds investing in mortgage securities. They were hoping things would get better. They reported what the values were - bad declines - we think they are oversold. Then exchange some emails complaining about market action devaluing their assets. Who knows what the ultimate payouts on their particular holding would have been - maybe they had valid complaints. If anyone should be charged it is Thain. He was telling the same story for nine months. the Bear guys were on the beginning before the full effects were evident.

2008 Aug 03 11:01 PM