Citi’s FINRA deal: Why ‘neither admit nor deny’ isn’t a problem

By Alison Frankel
January 19, 2012

On Wednesday, the Financial Industry Regulatory Authority disclosed a settlement with Citigroup that U.S. Senior Judge Jed Rakoff might find interesting. Citi agreed to pay a $725,000 fine to resolve allegations that it committed thousands of disclosure lapses in research reports issued between January 2007 and March 2010. (A big thanks to my Thomson Reuters colleague Stuart Gittleman of Accelus, who told me about Citi’s FINRA deal.) Among other disclosure problems, Citi failed to note its role as a manager or co-manager of a related public offering in 8 percent of the 80,000 reports it issued annually; it neglected to report investment banking revenue in 330 research reports; and it didn’t disclose its beneficial ownership in about 1,800 companies its analysts covered.

The FINRA consent letter, signed by Citi counsel Robert Romano of Morgan, Lewis & Bockius, sure makes it sound as though Citi was aware of its disclosure failures. The bank itself identified most of the lapses, which violated strict FINRA disclosure guidelines imposed on Wall Street firms after a 2003 investigation of conflicts of interest in analyst reports. (Citi agreed to pay a $400 million fine after that investigation.) The bank has already conducted two internal reviews of its disclosure systems, one in conjunction with a previous $350,000 fine for lapses committed between 2004 and 2006. In 2010, after continuing problems with internal systems and data from outside affiliates, Citi hired an independent consultant to recommend improvements in its technical disclosure processes. In Wednesday’s consent, the bank agreed (again) to accept a FINRA censure, which is now part of its permanent disciplinary record.

But you won’t find any outright admission of wrongdoing by Citi in Wednesday’s signed consent. To the contrary, the document is sprinkled with the phrase that has become known as Rakoff’s Scourge: “without admitting or denying.” Citi didn’t admit or deny the latest batch of disclosure failures, just as it didn’t admit or deny regulatory allegations in 2003 or alleged disclosure failures in 2006. The latest FINRA consent repeats the boilerplate from Citi’s two previous disclosure agreements with the industry regulator.

There’s no mystery why Citi favors such settlement language. Even though the FINRA consent bars the bank from implying in any way that FINRA’s allegations are unfounded, it also expressly states that “nothing in this provision affects [Citi's] right to take legal or factual positions in litigation or other proceedings in which FINRA is not a party.” That means that if Citi is accused of disclosure lapses by shareholders — or even by the SEC — it’s not hamstrung by the agreement with FINRA, however much it appears to concede in the consent letter.

Nor is FINRA’s reflexive acceptance of “without admitting or denying” boilerplate terribly surprising. As I’ve reported, that’s the standard language of enforcement agreements between corporate defendants and federal regulators, whether the Justice Department, the Commodity Futures Trading Commission, or the Federal Trade Commission.

Rakoff’s rejection of Citi’s proposed $285 million settlement with the Securities and Exchange Commission has certainly put a spotlight on such settlement language. The SEC, you’ll recall, recently conceded the silliness of its boilerplate in settlements involving defendants who have already admitted to or been convicted of related criminal charges. So it’s fair to ask why FINRA had no fear of including “without admitting or denying” language in the Citi consent.

The answer is that FINRA is an industry regulatory body, not a government agency whose settlements must be reviewed and approved by a federal judge. FINRA’s enforcement department must satisfy only itself of the fairness of a consent deal. In other words, no judge can call out FINRA or the bank for reaching a settlement that obscures the facts and violates the public interest.

FINRA said in a statement that Citi “failed to make required conflict of interest disclosures which prevented investors from being aware of potential biases in its research recommendations,” even though the statement went on to note that Citi “neither admitted nor denied the charges.” (Go figure.) The agency had similar language in an August 2010 press release announcing a similar settlement with Morgan Stanley, which agreed to pay a $800,000 fine for disclosure failures.

Citi counsel Romano of Morgan Lewis referred my call to a Citi spokesperson, who sent an email statement: “We are pleased to have settled this matter with FINRA. We take our disclosure systems very seriously and began adopting enhancements to our procedures prior to the inquiry.”

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