{"id":1082,"date":"2012-12-27T21:39:33","date_gmt":"2012-12-27T21:39:33","guid":{"rendered":"http:\/\/www.jlpp.org\/old_blog\/?p=1082"},"modified":"2012-12-27T21:39:33","modified_gmt":"2012-12-27T21:39:33","slug":"10b-or-not-10b","status":"publish","type":"post","link":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/2012\/12\/27\/10b-or-not-10b\/","title":{"rendered":"10b or not 10b?"},"content":{"rendered":"
\"(image
(image via AP)<\/figcaption><\/figure>\n\n
On October 16, 2012, Vikram Pandit<\/a> \u201cresigned\u201d his position as Chief Executive Officer (\u201cCEO\u201d) of Citigroup. The result of his resignation was an informal SEC investigation<\/a>.<\/div>\nIt seems today that CEOs are leaving and switching companies left and right. But what made Pandit\u2019s resignation shocking enough to warrant an SEC investigation? It might have been the manner in which Pandit stepped down and what was, or wasn\u2019t, said.\n\nOn the morning of October 15, Pandit released Citigroup\u2019s Third Quarter Earnings Report<\/a>. In the report, Pandit stated that Citigroup was headed in a generally positive direction, and he highlighted the \u201cpositive momentum<\/a>\u201d of Citigroup\u2019s core businesses. A few hours later, however, Pandit tendered his resignation<\/a>, effective immediately. This did not seem like a voluntary move on Pandit\u2019s part, rather, it seemed very clear that the board of directors forced<\/a> him out. The Board gave a different reason to the public, though. Chairman Michael O\u2019Neill reported to analysts<\/a> that, \u201cVikram chose to submit his resignation and the Board accepted it.\u201d While this is technically true, (Pandit did, in fact, resign) it was not the whole truth. When Pandit met with O\u2019Neill on October 15 after the earnings were released, Pandit was told to choose from three news releases regarding his departure. Pandit\u2019s options were to admit either that:\n
    \n\t
  1. Pandit had resigned, effective immediately;<\/li>\n\t
  2. Pandit would resign, effective at the end of the year; or<\/li>\n\t
  3. Pandit had been fired without cause.<\/li>\n<\/ol>\nBasically, O\u2019Neill and Citigroup lied to the public, which immediately aroused the SEC\u2019s suspicion. Rule 10b-5 of the Securities Exchange Act of 1934<\/a> specifically prevents such company dishonesty, and Citigroup\u2019s dishonesty triggered an informal investigation<\/a>.\n\nSEC chairman Harvey Pitt told CNBC<\/a> that, \u201c[i]f the Board pushed Pandit out, then Citigroup issued a false statement\u2026the reason for the CEO\u2019s departure is material, and Citigroup had an obligation to disclose any information necessary to render its statements fair, accurate, and complete. If the board forced Pandit out, Citigroup didn\u2019t do that<\/a>.\u201d Let\u2019s dig a little deeper into this charge. Rule 10b-5<\/a> states, summarily, that, \u201c[i]t shall be unlawful for any person, directly or indirectly\u2026to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made\u2026not misleading.\u201d A material fact<\/a> is a fact that a reasonable investor or shareholder would consider essential to make an informed decision to buy or sell a company\u2019s stock. Mr. Pitt is essentially saying that if Pandit didn\u2019t resign for his own reasons and was forced out due to poor performance or some other reason, then this is something that investors or shareholders would consider essential when making informed investment decisions. The fact that Citigroup\u2019s Michael O\u2019Neill omitted the true reason for Pandit\u2019s departure made his statement that Pandit resigned on his own terms misleading and a possible violation of Rule 10b-5.\n\nIf the SEC finds that there has been a violation of Rule 10b-5, they can bring a civil enforcement action<\/a>. In addition, investors that may have realized losses by buying or selling stock based upon this material misstatement may also have a cause of action, because regulations like 10b-5 have been enacted specifically in order to protect investors that may less knowledgeable than professional investment bankers or brokers. The SEC has made its intent clear: it is not okay for companies to lie to their investors, and Citigroup might have to be reminded of this the hard way. The public SEC investigation of Citigroup will hopefully spur other companies to question themselves when they make public statement as well, \u201c10b or not 10b? That is the question.\u201d","protected":false},"excerpt":{"rendered":"

    JLPP\u2019s Alex Poe describes why the SEC is investigating Citigroup after Citigroup\u2019s former CEO resigned.<\/p>\n","protected":false},"author":1,"featured_media":1083,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[28],"tags":[310,311,1004,1335,1360,1361,1362,1365,1633],"class_list":["post-1082","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-student-blogs","tag-citigroup","tag-citigroup-ceo","tag-material-misrepresentation","tag-rule-10b-5","tag-sec","tag-sec-investigation","tag-sec-regulation","tag-securities-exchange-act-of-1934","tag-vikram-pandit"],"acf":[],"_links":{"self":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts\/1082","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/comments?post=1082"}],"version-history":[{"count":0,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts\/1082\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/media\/1083"}],"wp:attachment":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/media?parent=1082"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/categories?post=1082"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/tags?post=1082"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}