A jury on Tuesday cleared a former Citigroup executive of wrongdoing connected to the bank's sale of risky mortgage-related investments at the peak of the housing boom, dealing a blow to the government's effort to hold Wall Street executives accountable for their conduct during the financial crisis.
In addition to handing up its verdict, the federal jury also issued an unusual statement addressed to the Securities and Exchange Commission, the government agency that brought the civil case.
“This verdict should not deter the S.E.C. from investigating the financial industry and current regulations and modify existing regulations as necessary,†said the statement, which was read aloud in the courtroom by Judge Jed S. Rakoff, who presided over the trial.
The trial of Brian Stoker, a former mid-level Citigroup executive, served as a referendum on a questionable practice that became common in the years leading up to the financial crisis: Selling clients comp lex securities tied to the housing market while simultaneously betting against those same securities.
The S.E.C. did not accuse Mr. Stoker of committing securities fraud. Instead, it accused him of negligence in preparing sales materials for a complex mortgage-related investment called a collateralized debt obligation, or C.D.O.s. The government claimed that Mr. Stoker knew or should have known that he was misleading investors by not disclosing that Citigroup helped select the underlying mortgage securities in the C.D.O. and then placed a large bet against it.
The S.E.C separately sued Citigroup, but Mr. Stoker was the only bank executive charged in the case. None of Citigroup's senior management was named by the commission.
As Mr. Stoker prepared for trial, his former employer, Citigroup, agreed to pay $285 million to settle a civil complaint brought by the S.E.C. related to the same deal. But Judge Rakoff, who presided over the trial of Mr. Stoker, reje cted that settlement. Both the commission and Citigroup have appealed the rejection of the settlement.
Mr. Stoker's lawyer, John Keker, had depicted his client as a scapegoat for the industry's sins. While decrying the “high-stakes, high level gambling†that banks engaged had in during the housing boom, Mr. Keker urged the jury to set aside any distaste that it had for Wall Street's questionable behavior and the mind numbingly complex mortgage securities that it concocted.
“It's not the bank or the transaction that's on trial here,†said Mr. Keker in his closing argument. “It's Brian Stoker.â€
Mr. Stoker's lawyers argued that Credit Suisse, the bank that Citigroup brought in to serve as a manager of the C.D.O., did its own homework on the underlying securities.
“We're grateful that justice was done and Brian Stoker can get back to his life,†Mr. Keker said outside the courtroom shortly after the verdict came down.
The allegations against Citigroup and Mr. Stoker parallel those brought by the S.E.C. in a more high-profile case against Goldman Sachs and Fabrice Tourre, a relatively junior Goldman executive.
In April 2010, the S.E.C. claimed that Goldman and Mr. Tourre deceived investors in a C.D.O. that the bank had created called Abacus. Mr. Tourre, the government said, failed to disclose that the hedge fund manager John Paulson helped select the underlying assets. Mr. Paulson profited by betting against the C.D.O.
Goldman quickly settled the case in July 2010 for $550 million, but Mr. Tourre, who has left the bank, is fighting the civil charges. Unlike the case against Mr. Stoker, which proceeded to trial quickly, Mr. Tourre's case has moved at glacial speed and no trial date has been set.
