Clarity and Predictability at the SEC: Abacus, Citigroup, and the Political Economy of Securities Fraud Settlements

Abstract

The United States Securities and Exchange Commission (“SEC”) recently brought several enforcement actions against large investment banks for transactions involving collateralized debt obligations (“CDOs”)—transactions that collectively cost their investors billions of dollars in losses.  In three actions involving separate banks, the SEC reached widely different results, despite alleging similar transaction structures in each case.  One commentator suggested that Citigroup benefited from a “late-mover” advantage in its dealings with the SEC.  This allowed the bank to reach a favorable settlement compared to the settlement achieved by Goldman Sachs.

This Note examines the salient details of each of the three transactions and settlements: Goldman Sachs’ ABACUS 2007-AC1, LTD; J.P. Morgan’s Squared CDO 2007-1, Ltd.; and Citigroup’s CLASS V Funding III, LTD.  It then evaluates how the nine factors the SEC uses to guide its settlement decisions appear to have been applied inconsistently across transactions.  Concluding that the nine factors do not adequately explain discrepancies in the settlement results, this Note argues that other differences, such as the timing of the suits, growing uncertainty regarding the applicability of legal standards to the available facts, and the varying public perception of each bank in question, provide more insight into the results of the SEC’s enforcement actions.