How Citigroup stays fraud-proof

Meet the lawyer who keeps getting the financial services company off the hook

Topics: AlterNet, Citigroup, Wall Street, Fraud, Enron, London, New York,

How Citigroup stays fraud-proof
This article originally appeared on AlterNet.

AlterNet It’s one of the few things that’s predictable on Wall Street; an immutable signature on the reply briefs whenever Citigroup is charged with fraud – and that is quite often.

Brad Karp, a partner at the 737-attorney-strong Wall Street law firm, Paul, Weiss, Rifkind, Wharton & Garrison LLP, has been Citigroup’s go-to guy for fraud allegations since the company was born out of the too-big-to-fail merger of Travelers Group insurance, its myriad Wall Street investment banks, brokerage units, and Citicorp, parent of Citibank.

When the London-based private equity firm, Terra Firma, claimed it had been lied to and defrauded by Citigroup, making it overpay for the purchase of EMI, a British music label, in 2007, Karp and colleagues wrung an 8-0 decision from the jury in favor of Citigroup. Karp was also on hand to witness victory when the trustee for the bankrupt Italian dairy giant, Parmalat, charged Citigroup with fraud. Then there were fraud charges connected to Citigroup’s involvement in the collapse of WorldCom AND Enron — along with auction rate securities, rigged stock research and understating its exposure to subprime debt by $39 billion. Karp, Karp, and more Karp.

The litany of fraud charges against Citigroup, accompanied by the perpetual get-out-of-jail-free card reliably delivered by Brad Karp, has become so ubiquitous that it raises the obvious question: is Citigroup the hapless target of a world-wide network of frivolous lawsuit filers, or does Brad Karp have some secret sauce for getting a serial miscreant off the hook?

As reported in Part I, something of an international incident involving Citigroup has spilled into a federal court in Manhattan, and again, it has Brad Karp’s name all over the reply briefs filed on behalf of Citigroup. The investment arm of an ally and trading partner to the United States, Abu Dhabi Investment Authority (ADIA), has charged Citigroup with lying and defrauding it of $4 billion in connection with a $7.5 billion investment it made when Citigroup was teetering in November 2007.

ADIA has asked the court to throw out an arbitration panel’s decision in favor of Citigroup. The court has sealed much of the record, but a careful reading of public filings and other government documents shows a Wall Street justice system as systemically corrupted as the subprime products that imploded the U.S. housing market and financial system in 2008.

Under a confidentiality agreement ADIA signed with Citigroup, the details and written decision of the arbitration cannot be made public. (Judge George B. Daniels, presiding over the case in the U.S. District Court for the Southern District of New York, might possibly entertain press requests that it is in the public interest to air all details of this matter.) All claims were to be administered and heard by the International Centre for Dispute Resolution of the American Arbitration Association (AAA), a group that substitutes its own “neutral” arbitrators for judge and jury.

The Board of Directors of AAA includes lawyers from most of the major Wall Street law firms. Its Board list of 2011–2012 includes representation from Allen & Overy LLP – the firm that created the Structured Investment Vehicles that helped crater Citigroup in 2008; Sullivan & Cromwell, LLP – the firm that served as advisor to Citigroup on its deal with ADIA as well as adviser on the $12.5 billion Group of Six deal on January 15, 2008 that caused ADIA’s value in its deal to collapse; Skadden, Arps, Slate Meagher & Flom, also an advisor to Citigroup on the Group of Six investment; Simpson Thacher & Bartlett LLP, whose law partner Roy Reardon served as an arbitrator in the ADIA matter; Quinn Emanuel Urquhart & Sullivan LLP, the firm representing ADIA in the arbitration against Citigroup, to name but a few.

Back in 2000, an embarrassing internal memo leaked out of the AAA, seriously calling into question the neutrality of its arbitrators. A regional Vice President of AAA, Paul L. Van Loon, penned a January 14, 2000, communication to AAA arbitrators, making the following request:

Part of our marketing effort for 2000 will be to develop business contacts with corporations headquartered in Northern California. Meeting with corporate counsel and CEOs will allow us the opportunity to develop personal relationships and explore the use of ADR in their business. To accomplish this, I am asking for your help. If you have a contact with a corporation and you can make the introduction for us, please print your name next to the corporation listed … Allowing us to make a “warm” call will make the connection more meaningful. If you would like to make the call with us, please indicate it on the sheet.

After the memo was released, Van Loon continued to serve as a vice-president of AAA through 2007.

Having seen this memo back in 2000, it came as no surprise to me when a quick and simple background check of the three arbitrators in the ADIA matter turned up a fistful of outrageous conflicts of interest on the part of two that would never be tolerated in a jury pool.

Roy Reardon, a partner at Simpson Thacher & Bartlett LLP has confirmed that he was one of the arbitrators. The case charged Citigroup with a $4 billion fraud. In a jury trial in a case of this magnitude, there would be serious vetting of the randomly selected jury pool to weed out the slightest conflicts of interest. It’s called a voir dire and it might go something like this: “I see Mr. Reardon that you work for a law firm. Have you or your firm ever represented the defendant in this matter, Citigroup?”

Reardon would have had to answer as follows: “Let’s see – we represented Citigroup in an exchange offer by Gannett in May 2009; we represented Citigroup in selling Bellsystem24 in November 2009; we secured the dismissal of a big putative class action against Citigroup’s banking unit, Citibank, on January 15, 2010, where plaintiffs contended that their leases were really usurious loans charging rates of interest in excess of 40 percent; we represented them again in June 2010 in a Sprint Nextel financing; and again in November 2010 in a revolving credit facility for General Motors. And, oh yes, we represented the U.S. Treasury in March 2009 when Citigroup exchanged shares of preferred stock into billions of common shares – diluting the hell out of ADIA’s investment along with most other Citigroup shareholders.”

The arbitration occurred in New York between May 2 and May 25, 2011. All of these conflicts occurred before that date. It is not known if they were ever disclosed.

Another arbitrator was Joseph T. McLaughlin, who passed away in January of this year. McLaughlin was of-counsel with the 1,000-attorney firm of Bingham McCutchen at the time of the arbitration in May of last year. Bingham McCutchen has advised Citigroup on numerous securitizations, debt deals and litigation. In 2006, Bingham McCutchen represented Citigroup in a New Hampshire case involving its notorious Capital Appreciation Plan (CAP Plan). The company was sued in states across the country for theft of employee wages.

Prior to becoming of-counsel at Bingham McCutchen, McLaughlin was chairman of the New York City office of Heller Ehrman, a law firm that was heavily engaged in representing Wall Street firms. At its peak, Heller Ehrman employed 730 attorneys on three continents. It filed for bankruptcy in December 2008. Citigroup was both its client and one of its two primary lenders.

Prior to Heller Ehrman, McLaughlin was a partner at Shearman & Sterling where he directly represented Citicorp, the predecessor to Citigroup.

The third arbitrator, Jonathan B. Marks, was a professional arbitrator/mediator, with no discernible ties to Wall Street. The decision of the arbitrators was delivered on October 14, 2011, and, not surprisingly, the group found in favor of Citigroup on all claims. (Imagine going back to face your law partners and advising them that you’ve just awarded $4 billion against their client.)

ADIA has now asked the U.S. District Court to vacate the award because Abu Dhabi law should have been followed since that is where both the fraud and the injury occurred. ADIA has also raised the claim that it could not adequately try its case because the arbitrators refused to grant discovery relevant to an internal whistleblower, Richard Bowen, who was alerting Citigroup’s top executives, including former Treasury Secretary Robert Rubin, that there was financial skullduggery afoot at the firm three weeks before the deal with ADIA was consummated.

Why counsel for ADIA is not asking to vacate the award based on abhorrent conflicts of interests says a great deal about Wall Street’s new brand of justice.

The U.S. Supreme Court building in Washington, DC, invokes the hallowed promise of “equal justice under law” above its front entrance. The much ballyhooed judicial vision for America is a fair and level playing field, regardless of social position; everyone from immigrants with a few dollars in their pockets to billionaire businessmen should be able to participate equally in a taxpayer-funded federal court system with an appeals process to remedy any errors or injustices of lower courts. Today, thanks to Wall Street and its legions of sycophant law firms, that promise is hollow, not hallowed.

Beginning in 1987, at the beckoning of an ever more rapacious Wall Street, the U.S. Supreme Court began to carve out a two-tiered justice system. Tier One remained the federal judiciary. Tier Two permitted Wall Street to effectively run its own crony private justice system, excising from the process every meaningful vestige of “equal justice under law.” It’s a form of judicial apartheid not dissimilar to the way the Supreme Court rationalized racial segregation in its Plessy v. Ferguson decision in 1896, promising “equal” facilities, just separate.

This so-called “forced” or “mandatory” arbitration system has cost Wall Street the loss of trust of customers and employees and now it is spreading out to humiliate the United States with its allies and trading partners. Instead of a jury randomly selected from a giant pool of voters or motor vehicle records, three arbitrators are picked from a small list. Arbitrators can earn upwards of $10,000 a day, building in an incentive to become a repeat player by ruling favorably for the deep-pocketed corporation. Legal precedent and case law can be substituted by the arbitrators for a ruling based on “equity” – what their gut tells them to do. The hearings are held in secret, denying the public and the press the role of monitor. Appeals are next to impossible because the arbitrators are not required to write a reasoned decision based on case law. Federal judges have been schooled not to mess with the sanctity of private arbitration contracts.

The Seventh Amendment to the U.S. Bill of Rights enshrines the right to a jury trial for claims exceeding $20. “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.”

That the highest court in our land, in ruling after ruling, continues to permit that basic right to be gutted, is a national disgrace and it is leading to more discrediting of America around the world.

Today, the fine print in Wall Street brokerage accounts, employment contracts, credit cards, mortgages, even cell phone contracts have routinely removed the individual’s constitutional right to file a claim in court to seek redress of a grievance or fraudulent action.

In September 2007, Public Citizen published a comprehensive 74-page study of mandatory arbitration with a sharp focus on the National Arbitration Forum. The report is titled “The Arbitration Trap.” Among its many startling findings related to the National Arbitration Forum, Public Citizen found that in California between January 1, 2003 and March 31, 2007, “a small cadre of arbitrators handled most of the cases that went to a decision. In total, 28 arbitrators handled 17,265 cases – accounting for a whopping 89.5 percent of cases in which an arbitrator was appointed.” (Think robo-signing.) The arbitrators ruled for the corporation and against the consumer nearly 95 percent of the time.

The National Arbitration Forum is not an aberration. On July 20, 2000, the Public Investors Arbitration Bar Association (PIABA) issued a press release accusing the National Association of Securities Dealers (NASD) of rigging its computerized system of selecting arbitrators. The opening text reads as follows: “In direct and flagrant violation of federal law, the NASD systematically evaded the Securities and Exchange Commission approved ‘Neutral List Selection System’ arbitration rule requiring arbitrators to be selected on a rotating basis. Instead, the NASD secretly programmed its computers to select some arbitrators on a seniority basis – just what the rule was designed to prevent.”

On July 14, 2009, Minnesota Attorney General Lori Swanson charged the National Arbitration Forum with consumer fraud, deceptive trade practices, and false advertising, effectively working “alongside creditors behind the scenes – against the interest of consumers.” Swanson had obtained documents proving cross ownership of the arbitration group and the law firms representing the bank lenders.

When Swanson announced the suit, she was joined at the press conference by Richard Neely, a retired Chief Justice of the West Virginia Supreme Court of Appeals. Judge Neely had this to say about the National Arbitration Forum in the September/October 2006 issue of The West Virginia Lawyer:

A few years ago I answered a request from the National Arbitration Forum to join their panel of arbitrators. I thought I was invited because I was a former state supreme court judge. Stupid me! I was just another piece of raw meat … Thus I learned how Godless bloodsucking banks have converted apparently neutral arbitration forums into collection agencies to exact the last drop of blood from desperate debtors … Banks and other bloodsuckers make campaign contributions and single moms don’t. That accounts for the current Federal system.

More Related Stories

Featured Slide Shows

  • Share on Twitter
  • Share on Facebook
  • 1 of 11
  • Close
  • Fullscreen
  • Thumbnails

    Ten spectacular graphic novels from 2014

    Beautiful Darkness by Fabien Vehlmann & Kerascoët
    Kerascoët's lovely, delicate pen-and-watercolor art -- all intricate botanicals, big eyes and flowing hair -- gives this fairy story a deceptively pretty finish. You find out quickly, however, that these are the heartless and heedless fairies of folk legend, not the sentimental sprites beloved by the Victorians and Disney fans. A host of tiny hominid creatures must learn to survive in the forest after fleeing their former home -- a little girl who lies dead in the woods. The main character, Aurora, tries to organize the group into a community, but most of her cohort is too capricious, lazy and selfish to participate for long. There's no real moral to this story, which is refreshing in itself, beyond the perpetual lessons that life is hard and you have to be careful whom you trust. Never has ugly truth been given a prettier face.

    Ten spectacular graphic novels from 2014

    Climate Changed: A Personal Journey Through the Science by Philippe Squarzoni
    Squarzoni is a French cartoonist who makes nonfiction graphic novels about contemporary issues and politics. While finishing up a book about France under Jacques Chirac, he realized that when it came to environmental policy, he didn't know what he was talking about. "Climate Changed" is the result of his efforts to understand what has been happening to the planet, a striking combination of memoir and data that ruminates on a notoriously elusive, difficult and even imponderable subject. Panels of talking heads dispensing information (or Squarzoni discussing the issues with his partner) are juxtaposed with detailed and meticulous yet lyrical scenes from the author's childhood, the countryside where he takes a holiday and a visit to New York. He uses his own unreachable past as a way to grasp the imminent transformation of the Earth. The result is both enlightening and unexpectedly moving.

    Ten spectacular graphic novels from 2014

    Here by Richard McGuire
    A six-page version of this innovative work by a regular contributor to the New Yorker first appeared in RAW magazine 25 years ago. Each two-page spread depicts a single place, sometimes occupied by a corner of a room, over the course of 4 billion years. The oldest image is a blur of pink and purple gases; others depict hazmat-suited explorers from 300 years in the future. Inset images show the changing decor and inhabitants of the house throughout its existence: family photos, quarrels, kids in Halloween costumes, a woman reading a book, a cat walking across the floor. The cumulative effect is serene and ravishing, an intimation of the immensity of time and the wonder embodied in the humblest things.

    Ten spectacular graphic novels from 2014

    Kill My Mother by Jules Feiffer
    The legendary Pulitzer Prize-winning cartoonist delivers his debut graphic novel at 85, a deliriously over-the-top blend of classic movie noir and melodrama that roams from chiaroscuro Bay City to Hollywood to a USO gig in the Pacific theater of World War II. There's a burnt-out drunk of a private eye, but the story is soon commandeered by a multigenerational collection of ferocious women, including a mysterious chanteuse who never speaks, a radio comedy writer who makes a childhood friend the butt of a hit series and a ruthless dame intent on making her whiny coward of a husband into a star. There are disguises, musical numbers and plenty of gunfights, but the drawing is the main attraction. Nobody convey's bodies in motion more thrillingly than Feiffer, whether they're dancing, running or duking it out. The kid has promise.

    Ten spectacular graphic novels from 2014

    The Motherless Oven by Rob Davis
    This is a weird one, but in the nervy surreal way that word-playful novels like "A Clockwork Orange" or "Ulysses" are weird. The main character, a teenage schoolboy named Scarper Lee, lives in a world where it rains knives and people make their own parents, contraptions that can be anything from a tiny figurine stashable in a pocket to biomorphic boiler-like entities that seem to have escaped from Dr. Seuss' nightmares. Their homes are crammed with gadgets they call gods and instead of TV they watch a hulu-hoop-size wheel of repeating images that changes with the day of the week. They also know their own "death day," and Scarper's is coming up fast. Maybe that's why he runs off with the new girl at school, a real troublemaker, and the obscurely dysfunctional Castro, whose mother is a cageful of talking parakeets. A solid towline of teenage angst holds this manically inventive vision together, and proves that some graphic novels can rival the text-only kind at their own game.

    Ten spectacular graphic novels from 2014

    NOBROW 9: It's Oh So Quiet
    For each issue, the anthology magazine put out by this adventurous U.K.-based publisher of independent graphic design, illustration and comics gives 45 artists a four-color palette and a theme. In the ninth issue, the theme is silence, and the results are magnificent and full of surprises. The comics, each told in images only, range from atmospheric to trippy to jokey to melancholy to epic to creepy. But the two-page illustrations are even more powerful, even if it's not always easy to see how they pertain to the overall concept of silence. Well, except perhaps for the fact that so many of them left me utterly dumbstruck with visual delight.

    Ten spectacular graphic novels from 2014

    Over Easy by Mimi Pond
    When Pond was a broke art student in the 1970s, she took a job at a neighborhood breakfast spot in Oakland, a place with good food, splendid coffee and an endlessly entertaining crew of short-order cooks, waitresses, dishwashers and regular customers. This graphic memoir, influenced by the work of Pond's friend, Alison Bechdel, captures the funky ethos of the time, when hippies, punks and disco aficionados mingled in a Bay Area at the height of its eccentricity. The staff of the Imperial Cafe were forever swapping wisecracks and hopping in and out of each other's beds, which makes them more or less like every restaurant team in history. There's an intoxicating esprit de corps to a well-run everyday joint like the Imperial Cafe, and never has the delight in being part of it been more winningly portrayed.

    Ten spectacular graphic novels from 2014

    The Shadow Hero by Gene Luen Yang and Sonny Liew
    You don't have to be a superhero fan to be utterly charmed by Yang and Liew's revival of a little-known character created in the 1940s by the cartoonist Chu Hing. This version of the Green Turtle, however, is rich in characterization, comedy and luscious period detail from the Chinatown of "San Incendio" (a ringer for San Francisco). Hank, son of a mild-mannered grocer, would like to follow in his father's footsteps, but his restless mother (the book's best character and drawn with masterful nuance by Liew) has other ideas after her thrilling encounter with a superhero. Yang's story effortlessly folds pathos into humor without stooping to either slapstick or cheap "darkness." This is that rare tribute that far surpasses the thing it celebrates.

    Ten spectacular graphic novels from 2014

    Shoplifter by Michael Cho
    Corinna Park, former English major, works, unhappily, in a Toronto advertising agency. When the dissatisfaction of the past five years begins to oppress her, she lets off steam by pilfering magazines from a local convenience store. Cho's moody character study is as much about city life as it is about Corinna. He depicts her falling asleep in front of the TV in her condo, brooding on the subway, roaming the crowded streets after a budding romance goes awry. Like a great short story, this is a simple tale of a young woman figuring out how to get her life back, but if feels as if it contains so much of contemporary existence -- its comforts, its loneliness, its self-deceptions -- suspended in wintery amber.

    Ten spectacular graphic novels from 2014

    Through the Woods by Emily Carroll
    This collection of archetypal horror, fairy and ghost stories, all about young girls, comes lushly decked in Carroll's inky black, snowy white and blood-scarlet art. A young bride hears her predecessor's bones singing from under the floorboards, two friends make the mistake of pretending to summon the spirits of the dead, a family of orphaned siblings disappears one by one into the winter nights. Carroll's color-saturated images can be jagged, ornate and gruesome, but she also knows how to chill with absence, shadows and a single staring eye. Literary readers who cherish the work of Kelly Link or the late Angela Carter's collection, "The Bloody Chamber," will adore the violent beauty on these pages.

  • Recent Slide Shows



Comment Preview

Your name will appear as username ( settings | log out )

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>