Cliff Owen/Associated PressRobert Khuzami, the S.E.C.’s director of enforcement, said the department would continue to pursue misconduct.A federal jury on Tuesday cleared a Citigroup executive of wrongdoing in connection with the bank’s sale of risky mortgage-related investments at the peak of the housing boom, dealing a blow to the government’s effort to hold Wall Street executives accountable for their conduct during the financial crisis.
The Securities and Exchange Commission had accused Brian Stoker, a former midlevel Citigroup executive, with negligence related to his role in creating exotic mortgage securities known as collateralized debt obligations, or C.D.O.’s. In a lawsuit filed last October, the government said that Mr. Stoker, who prepared sales materials for C.D.O.’s, knew or should have known that he was misleading investors by not disclosing that Citigroup helped select the underlying mortgage securities in the C.D.O. and then placed a large bet against it.
The jury rejected the S.E.C.’s case, concluding that Mr. Stoker was not liable under the securities laws. In addition to handing up its verdict, the jury also issued an unusual statement.
Documents: S.E.C. v. Brian H. Stoker“This verdict should not deter the S.E.C. from investigating the financial industry, to review current regulations and modify existing regulations as necessary,” said the jury’s statement, which was read aloud in the courtroom by Judge Jed S. Rakoff, who presided over the two-week trial in Federal District Court in Manhattan.
The statement appeared to echo frustration felt by many Americans that Wall Street executives had not been held responsible for its questionable actions leading up to the financial crisis, and that financial industry reform had thus far been inadequate.
In his own statement, Robert Khuzami, the S.E.C.’s director of enforcement, appeared to take the jury’s message to heart.
“We respect the jury’s verdict and will continue to aggressively pursue misconduct arising out of the financial crisis,” he said.
The S.E.C. had filed separate civil fraud charges against Citigroup in connection with the C.D.O. deal, but none of the bank’s senior managers were named in the lawsuit. Mr. Stoker was the only individual Citigroup executive charged in the case.
Mr. Stoker’s lawyer, John W. Keker, had depicted his client as a scapegoat for Wall Street wrongdoing. While decrying the “high-stakes, high-level gambling” that banks had engaged in during the housing boom, Mr. Keker urged the jury to set aside any distaste that it had for the financial industry’s dubious behavior and the complex mortgage securities that it concocted. He also emphasized that Mr. Stoker was a relatively junior executive whose actions were ordered by his bosses.
“It’s not the bank or the transaction that’s on trial here,” Mr. Keker said in his closing argument. “It’s Brian Stoker.”
As Mr. Stoker prepared for trial, his former employer agreed to pay $285 million to settle a civil complaint brought by the S.E.C. related to the same deal. But Judge Rakoff rejected that settlement. Calling the amount of money Citigroup had agreed to pay “pocket change” for the bank, he said the settlement deprived the public “of ever knowing the truth in a matter of obvious public importance.”
Both the S.E.C. and Citigroup appealed Judge Rakoff’s rejection of the settlement. In March, a federal appeals court ruled that Judge Rakoff might have overstepped his authority in scuttling the deal.
Danielle Romero-Apsilos, a Citigroup spokeswoman, said the bank agreed with the jury’s verdict and hoped “to secure final judicial approval of our settlement with the S.E.C. and put this matter behind us.”
The trial of Mr. Stoker served as a referendum on a questionable practice that became common in the run-up to the housing market’s collapse: selling clients complex securities tied to mortgages while simultaneously betting against those same securities.
As real estate prices peaked in the middle of the last decade, Citigroup and other banks dived headlong into C.D.O.’s, bundles of mortgage securities pooled together and sold to investors who wanted to benefit from the housing boom. At the same time, another group of investors had a negative view of the housing market and wanted to bet against these C.D.O.’s.
Citigroup decided to play both sides of the trade. Mr. Stoker helped create a $1 billion C.D.O. structure — which was called Class V Funding III — that it sold to a group of sophisticated investors, including the bond insurer Ambac Financial Group and Koch Global Capital, an investment vehicle controlled by the billionaire Koch brothers.
The S.E.C. contended that Citigroup also used the deal to make a $500 million bet against the housing market. Citigroup secretly stuffed the C.D.O. with toxic mortgages that the bank thought would lose value and then took the opposite view of its clients. And Mr. Stoker negligently failed to include this information in the C.D.O.’s marketing materials, the government said.
“Citigroup stacked the deck and Brian Stoker dealt the cards,” said Jeffrey Infelise, a lawyer for the S.E.C., during his closing statement.
Lawyers for Mr. Stoker presented evidence that Citigroup’s marketing materials for the C.D.O. contained warnings that the investment was especially risky and disclosed that Citigroup might bet against the security. Mr. Stoker’s lawyers also argued that Credit Suisse, the bank that Citigroup brought in to serve as a manager of the C.D.O., did its own homework on the underlying securities.
Mr. Stoker, who in 2007 was paid about $2.4 million by Citigroup, left the bank in 2008. A graduate of the University of Virginia and Harvard Business School, Mr. Stoker worked at Merrill Lynch and the hedge fund Carlson Capital before joining Citigroup. He lives with his wife and children in Pound Ridge, N.Y.
A broad smile came across Mr. Stoker’s clean-cut face as the verdict was read. When Mr. Keker threw his arm around him, Mr. Stoker appeared overcome with emotion. As the jurors left the courtroom, Mr. Stoker tried to connect with them, silently signaling his thanks with a grin and a nod of his head.
“We’re grateful that justice was done and Brian Stoker can get back to his life,” Mr. Keker said.
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