How the Big Banks Are Trying to Destroy Our Justice System
The following is Part II of an investigative series on Citigroup and fraud. Part 1, which reveals that Citigroup may have defrauded Abu Dhabi of billions, can be read here.
It’s one of the few things 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-too-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 i 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."
Prior to Heller Ehrman, McLaughlin was a partner at Shearman & Sterling where he directly represented Citicorp, the predecessor to Citigroup.