Citigroup was in a bind.
Two years ago, the Securities and Exchange Commission was considering charging the firm’s former chief financial officer with misleading investors by understating Citigroup’s exposure to subprime mortgages.
To help defuse the situation, Citigroup added to its legal team a criminal defense lawyer named Mark Pomerantz, who had some special qualifications. As Pomerantz later told the SEC’s inspector general, he had supervised SEC enforcement director Robert Khuzami when the two worked for the Justice Department, and he had helped get Khuzami a promotion.
On behalf of Citigroup, Pomerantz wrote to Khuzami in 2010 asking for a meeting. According to a newly released report by the inspector general, Pomerantz said he wanted to reinforce the point that charging the former executive with fraud “would have very large implications for Citigroup.”
Asked why he sent the e-mail instead of another defense lawyer more involved in the case, Pomerantz told the inspector general: “I guess because I knew him, I was the one who sent the e-mail.”
In a long-awaited report released this week, SEC Inspector General H. David Kotz exonerated Khuzami of accusations that he acted improperly in the case and that Citigroup executives avoided fraud charges as a result of “special access and preferential treatment.”
Instead, the inspector general’s office “found that the settlements were part of a negotiation process that involved several members of the Enforcement staff,” the report said.
But the report shows just how close the enforcers at the SEC can be to their adversaries, the lawyers who defend Wall Street professionals and firms in agency probes.
The inspector general’s investigation was requested by Sen. Charles E. Grassley (R-Iowa) based on an unsigned letter alleging improprieties. Grassley said in a statement that he was disappointed that the SEC had blacked out entire pages of the inspector general’s report before making it public.
Still, the remaining text offers a rare inside view of the interplay between the investigators and the investigated.
Pomerantz wasn’t the only former Khuzami colleague enlisted to defend Citigroup and its personnel against allegations of investor fraud. One company executive was represented by lawyer Mark Stein, who worked with Khuzami on two money-laundering cases when they were both at the U.S. attorney’s office in Manhattan, the inspector general said.
Another was represented by John Carroll, who “briefly overlapped” with Khuzami at the U.S. attorney’s office.
And, after Khuzami left the U.S. attorney’s office to take a high-level job at Deutsche Bank, he retained Pomerantz to do legal work for Deutsche Bank, the inspector general reported.
The exact nature of Khuzami’s working relationship with Pomerantz during their days at Justice was the subject of some confusion. Khuzami told the inspector general’s office that he was unsure of whether he reported to Pomerantz because the reporting hierarchy was “pretty flat,” but he recalled that they had interacted on more than a weekly basis, the report said.
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