Rubin, Citigroup Sued for Ponzi Scheme

BY CHRIS PETHERICK

Former Clinton Treasury Secretary Robert Rubin and several Citigroup executives are facing a federal lawsuit filed by investors, who charge that the bankers created a “Ponzi-like scheme” to keep one of the largest financial institutions afloat so they could quietly unload their stock and protect their fortunes. 

It’s become a common story now on Wall Street: Bankers and investment firms packaged up bad loans, known as collateralized debt obligations, and sold them to investors around the world as safe investments. But when borrowers began to default on the lousy loans, the whole house of cards came crashing down. Eventually, financial institutions were swamped with toxic assets and went running to the government for a trillion-dollar bailout. 

In the case of Rubin, who is currently acting as an economic advisor to President-elect Barack Obama, and his cronies, they took an extra step that may have been illegal, according to the lawsuit. It is alleged that, starting four years ago,
Rubin and some Citigroup executives started dumping the bad debt in various shell corporations to keep it off the books. Rubin and his banking buddies then slowly sold off stock, pocketing hundreds of millions of dollars to protect their own fortunes. 

When news of Citigroup’s troubled assets was made public, the stock tanked, losing nearly 90 percent of its value in one year. But by this time, it was too late for most investors, who were forced to take the hit for the bank’s exposure to mortgage-related securities and instruments. Now, a group of investors has filed a federal lawsuit in Manhattan, claiming that the bankers hid the bad debt from investors until the bottom fell out and they lost some $122 billion. 

The lawsuit charges that Rubin and his pals were able to prop up Citigroup shares until they could cash out more than $150 million for themselves in “suspicious” stock sales that were “calculated to maximize the personal benefits from undisclosed inside information.” 

Citigroup executives created “a quasi-Ponzi scheme” to hide troubled assets and keep Citigroup’s stock up while they unloaded some 3 million shares between Jan. 1, 2004, and Feb. 22, 2008, for massive profits. 

In broader terms, the case against Rubin and Citigroup execs could be the start of a series of high-profile investor lawsuits targeting banks and other financial institutions, because it appears that most did this to save their own hides. “If Citi is getting sued for this, who’s going to be next?” analyst Christopher Whalen told Bloomberg News. “The whole industry did this.” For the incoming Obama administration, the lawsuit against Rubin, who has been advising the presidentelect on the economic crisis, could prove embarrassing. 

A long-time advocate of deregulating Wall Street, which allowed financial institutions to consolidate into one-stop shopping for insurance, banking and investments, Rubin has been fingered as one of the former Clintonites who is responsible for the current mess. Rubin is perhaps best known for pushing the North American Free Trade Agreement under President Clinton in the early 1990s. 

Rubin also regularly defended financial instruments known as derivatives before Congress throughout the 1990s. Derivatives are largely to blame for the financial crisis today. So far this year, Citigroup has benefited from $306 billion in bailout money from the government and low-interest loans from the Federal Reserve.

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