Giving Notice of Wrongful Conduct

One focus of agency enforcement actions is the prevention of future violations and the protection of investors and markets. This can be accomplished in part by notice, that is, informing the public what specific conduct violates a statute or rule.

One key method to accomplish this is the complaint or Oder entered announcing the wrongful conduct while another can be at least a brief identification of that conduct in subsequent orders. Viewed in this context, the purpose for an agency like the Commission to publish detailed complaintst or Order is to give notice to the public of what specific type of conduct the agency views as wrongful. Integral to that process is a statement of the reasons the conduct violated the statutory sections and rules alleged to have been violated and the remedies imposed not just as penalties but to help forestall similar conduct in the future. Stated differently, the purpose of filing a detailed complaint or Order is to prevent a reoccurrence of the wrongful conduct in the future to protect the markets and the public.

While the detail need not be repeated in each subsequent order, the description should include at least an identification of the conduct. Yet the Commission’s most recent Order in a multi-million dollar action that went on for years wholly fails to identify the wrongful conduct in any meaningful way which resulted in significant financial sanctions. In the Matter of Citigroup Alternative Investments LLC and Citigroup Global Markets Inc., Adm. Pro. Proceedings, File Ni, 3-16757 (March 26, 2025).

The Order issued this week by the Commission in the action cited above is the concluding segment of a years long proceeding. It transfers to the Department of Treasury the remaining funds and discharges the fund administrator. According to the Order, the wrongful conduct violated Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) & (4) and the related rules. The Order then goes on to specify that a plan was adopted which included the creation of a plan of distribution for the funds were collected. Those funds amounted to $184,864,153.

While the sum collected and distributed is significant, the description of the wrongful conduct is not with the exception of the initial Order issued years ago. In this regard the current Order only states that “the Commission found that Respondents made material misstatements and omissions between 2002 and 2008 relating to both the offer and sale of securities in the two now defunct hedge funds.

The readers that trace the history of the proceedings back years learn, however, learns not just that there were misstatements but that the underlying conduct is based on the repetition of misleading statements and unauthorized investor trades for a period of six years tied in part from deficient internal controls. Those trades resulted in millions of dollars in damages by a well know and leading U.S. financial institution.

If the investing public is going to learn one of the key lessons from this action – they must carefully monitor their investments and not just rely on others – at least the nature of the wrongful conduct should be specified beyond “false statements” or similar vague statements which actually say nothing meaningful about what generated years of litigation. That kind of statement is wholly missing here.