Thank goodness for Brian Stoker and his lawyers at Keker & Van Nest.
Because of Stoker’s resistance to settling and the efforts of his lawyers, we’re finally getting a clearer picture of what happened behind the scenes when Citigroup put together the $1 billion collateralized debt obligation called Class V Funding III that crashed in 2007. Stoker is the former Citi employee who was singled out by the Securities and Exchange Commission and sued for negligence along with Citi for allegedly misleading investors who saw $700 million vanish in that CDO. According to the SEC, Stoker and Citi should have told investors that Citi selected some nasty assets that went into the CDO and then bet against those assets, making $250 million on that bet, as well as $34 million in fees.
Citi tried to settle these charges for $285 million without admitting wrongdoing, but, as you know, Manhattan U.S. District Court Judge Jed Rakoff took a toughand unprecedentedstand against that deal last November. Blasting the SEC for its timidity in this ruling, he objected that he didn’t have sufficient information to determine if this settlement was in the public interest. The SEC and Citi appealed and the case is now before the U.S. Court of Appeals for the Second Circuit, which has already made it clear that it didn’t like what Rakoff did.
Meanwhile, Stokerwho maintains that neither he nor anyone at Citi did anything wronghasn’t settled, which makes things very interesting. On Tuesday, Rakoff denied Stoker’s motion for summary judgment in this 21-page ruling, putting this case on track for a trial starting Monday. With John Keker taking the lead for Stoker, I’m betting that a trial will shine a lot of light on the behind-the-scenes maneuverings at Citi in the run-up to the financial crisis.
But we don’t have to wait for a trial to learn more. In their motion for summary judgmentwhich includes lots of deposition testimony in 43 exhibitsStoker’s lawyers at Keker & Van Nest have already filled in some of the blanks in this important case. For one thing, they stress that Stoker, whom they describe as a “former mid-level director” on Citi’s CDO restructuring desk, was hardly the only person involved in this allegedly deceptive deal. “Citigroups involvement was a collective effort of members of the structuring and syndicate desks, as well as internal and external counsel,” they write. And Stoker names names.
For instance: Donald Quintin, the managing director of the Citi CDO Group’s secondary trading desk at the time, and Darius Grant, who was Stoker’s supervisor. According to Stoker’s court filings, it looks as if Quintin was the person who set this CDO in motion. In October 2006 Quintin asked Stoker to structure a CDO that Quintin would use to execute a proprietary trade and sent Stoker a list of 21 assets that he wanted included in the CDO so that he could bet against them, according to Stoker’s deposition. Investors were told that Credit Suisse Alternative Capital would be the collateral manager for the deal that would select the assets for the CDO, which the SEC says was misleading. In November 2006, Stoker’s supervisor Grant asked Stoker whether the proposed CDO would go forward, and Stoker replied: “I hope so. This is [Quintin's] prop trade (don’t tell CSAC). CSAC agreed to terms even though they don’t get to pick the assets.”
Keker also points out that Milbank, Tweed, Hadley & McCoy had overall responsibility for drafting and revising the offering circular that was given to investors. “Milbank was responsible for ensuring the accuracy of the legal components of the Offering Circular, including the risk factors,” Stoker asserts. In his ruling on Tuesday, however, Rakoff states that Stoker didn’t disclose to outside counsel Citigroup’s role in selecting assets or that it already had a $500 million naked short position on those assets.
Rakoff also wasn’t swayed by the argument that Stoker shouldn’t be held responsible because others helped put together this deal. “Indeed, the fact that Stoker was one of several people working on the Marketing Materials is irrelevant, because Stoker is liable as long as he used the statements, whether prepared by himself of another,” Rakoff wrote.
We contacted Milbank, but didn’t hear back. Quintin, who is now at Lone Star Funds, declined to comment. We left a message for Grant, who is now at Vero Capital Management, but didn’t hear back. Citi declined to comment.
These are just some of the details that were left out of the SEC’s proposed settlement with Citi, as well as from the complaint that it filed against Stoker. I understand Rakoff’s frustration with being asked to bless the Citi settlement when so many questions were unanswered. Among other things, why did the SEC single out Stoker, when so many others played important roles?
Brian Stoker may not have been a big fish on Wall Street, but if his case goes to trial, he and his lawyers could help us understand better how the Street works. And that would be a good thing.
This article originally appeared in The AmLaw Litigation Daily.