A System Designed to Separate You From Your Money

Given countless examples of misconduct, why do we continue to invest with brokers?


The Securities and Exchange Commission announced a settlement with Citigroup on October 19. As part of the deal, Citigroup agreed to pay $285 million to settle charges that it mislead investors in connection with a $1 billion collateralized debt obligation tied to the U.S. housing market. The investment tanked shortly after it was sold, causing the investors to lose virtually their entire investment. Citigroup pocketed $34 million for structuring and marketing the transaction, but that’s not where the big bucks were made. They earned an additional $126 million by betting against the interest of its investors.

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Citigroup didn’t disclose that it exercised significant influence over the selection of $500 million of the assets in the toxic portfolio and then took a short position against those assets. The transaction closed on February 28, 2007. Prior to closing, there was rejoicing in the halls of Citigroup. One trader characterized the portfolio in an e-mail as “possibly the best short EVER!” An experienced collateral manager noted: “The portfolio is horrible.”

Citigroup had a willing partner is this scheme. It retained Credit Suisse Alternative Capital (CSAC) as a collateral manager for the transaction. According to the SEC, CSAC allowed Citigroup to exercise its influence over the selection of the assets in this portfolio. In a separate proceeding, the SEC charged CSAC and its successor in interest, Credit Suisse Asset Management, with violations of the Investment Advisers Act and the Securities Act for the roles it played in the preparation of the pitch book and the offering circular for this transaction. These entities agreed to disgorge $1 million in fees, plus $250,000 in prejudgment interest, and to pay a penalty of $1.25 million.

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As is customary in these cases, neither Citigroup nor the Credit Suisse entities admitted to any wrongdoing. This is a standard practice with SEC settlements. It permits these companies to defend against civil lawsuits arising out of this conduct, and forces the plaintiffs in those cases to relitigate the issue of liability.

These are not isolated instances of misconduct by major players in the securities industry. The SEC has brought 81 charges stemming from the financial crisis against companies and individuals and has recovered $1.97 billion.

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You wouldn’t use a lawyer to try a case in which he stood to gain if the jury returned a verdict adverse to you. You wouldn’t use a doctor who stood to benefit if the treatment he gave you made your condition worse. So here’s my question to you: Why are you using brokers whose conduct has been legally, morally, and ethically bankrupt to manage your money?

Dan Solin is the author of the New York Times best sellers, The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, was released in September, 2011.

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