The SEC concluded its investigation of Citigroup's alleged misconduct in the mortgage securities market during the housing bubble by entering into a settlement agreement with Citigroup pursuant to which the latter agreed to pay a fine of $75 million. Although that sounds like a lot of money, for Citigroup it's just a drop in the bucket, especially when you consider that the SEC originally alleged that Citigroup understated its exposure to subprime assets in 2007 by nearly $40 billion
When asked to approve the settlement, Judge Ellen Segal Huvelle recently balked. The WSJ reports:
The judge, striking a frustrated tone, fired several questions at the SEC, among them why it pursued only two individuals in the case and why Citigroup shareholders should have to pay for the alleged sins of bank executives.
"I look at this and say, 'Why would I find this fair and reasonable?'" the judge told both sides at a 90-minute hearing. "You expect the court to rubber-stamp, but we can't."
The small size of the fine seems readily explicable: The SEC didn't have much of case. From what's been made public about the case, it looks to me like Citigroup committed bad business decisions, not fraud. In context, Citigroup treated the SEC case as a nuisance suit and paid a trifling $75 million to make it go away, just as they might throw a bogus slip and plaintiff a few bucks to make her suit go away.
As for why Citigroup shareholders should have to pay rather than the executives who committed the malfeasance, that's a damned good question. Personally, I don't see much point to corporate entity liability, as I explained in a commentary on corporate slavery reparations:
Legal liability can be justified on a number of grounds, such as deterrence, compensation, and retributive justice. Requiring a corporation to pay reparations to victims of centuries or even decades old wrongs advances neither deterrence nor retributive justice.
Who do we punish when we force the corporation to pay reparations? Since the payment comes out of the corporation's treasury, it reduces the value of the residual claim on the corporation's assets and earnings. In other words, the shareholders pay, not the directors and officers who actually committed the alleged wrongdoing (who in most of these cases are long dead anyway).
As far as deterrence goes, the problem is that shareholders don't control corporations. Corporation law assigns the responsibility for making corporate policy to the board of directors and the firm's managers. Holding the shareholders liable for something that happened decades ago is unlikely to have much deterrent effect on the corporation's current directors and managers. Human nature being what it is, current managers likely believe that they won't commit the errors of their predecessors. On top of which, the prospect that shareholders will be held liable is far less likely to deter management misconduct than would the prospect that the managers who made the decisions would be held personally liable.
Retributive justice likewise is poorly-served by corporate-level liability. Retributive justice is legitimate only where the actor to be punished has committed acts to which moral blameworthiness can be assigned. Because the corporation's legal personhood is a mere legal fiction, however, a corporation is not a moral actor.
Edward, First Baron Thurlow, put it best: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and nobody to be kicked?" The corporation is simply a nexus of contracts between factors of production. As such, there is no moral basis for applying retributive justice to a corporation -- there is nothing there to be punished.
Even if you assume the corporation is still benefiting from alleged wrongdoing that happened decades or even centuries ago, the modern shareholders are mere holders in due course. It is therefore difficult to see a moral basis punishing them. They have done nothing for which they are blameworthy.
In sum, both deterrence and retributive justice require that punishment be directed solely at those who actually commit wrongdoing. In this context, it would be the directors, officers, or controlling shareholders who actually enslaved people. Since they're long dead, there is nobody left who properly can be punished.
Given that the vast bulk of securities law claims are resolved in ways that benefit only the lawyers who brought the class action rather than the allegedly injured investors, compensatory rationales don;t work either.
