Public Agencies and High Stakes ($7 Billion) Investor Compensation

The New York Times reports today that Citigroup is on the brink of settling claims that it misled clients about investments in auction-rate securities. According to the Times, the settlement is with state and federal regulators and includes a buy-back of more than $7 billion of these securities from individual investors. How to handle institutional investors is apparently still up in the air or at least has not been leaked/reported. The settlement also includes civil fines: reportedly a $100 million fine to the New York attorney general and $50 million each to twelve state regulators, led by the Texas State Securities Board.

This strikes me as a good example of a growing role of public agencies in investor compensation (here through the buyback and possibly the fines) that I pointed to in my article Fair Funds and the Compensation Conundrum. There I introduced the concept of "public class counsel" - the public counterpart to the private attorney general - to describe public actors concerned with compensation as well as deterrence. My focus was on the SEC's role in investor compensation, which has intensified in recent years as the Sarbanes-Oxley "Fair Fund" provision allows it to distribute money penalties to injured investors. Whereas this Citigroup settlement does not involve an SEC penalty - according to the Times, the SEC participated but any SEC penalty is on hold pending the agency's own investigation - it does provide a good example of public class counsel at work. This in turn suggests that, as the story develops, we should keep our eyes not just on the interesting consortium of regulators negotiating the settlement, but also on who gets the penalty money down the line.