It seems today that CEOs are leaving and switching companies left and right. But what made Pandit’s resignation shocking enough to warrant an SEC investigation? It might have been the manner in which Pandit stepped down and what was, or wasn’t, said.
On the morning of October 15, Pandit released Citigroup’s Third Quarter Earnings Report. In the report, Pandit stated that Citigroup was headed in a generally positive direction, and he highlighted the “positive momentum” of Citigroup’s core businesses. A few hours later, however, Pandit tendered his resignation, effective immediately. This did not seem like a voluntary move on Pandit’s part, rather, it seemed very clear that the board of directors forced him out. The Board gave a different reason to the public, though. Chairman Michael O’Neill reported to analysts that, “Vikram chose to submit his resignation and the Board accepted it.” While this is technically true, (Pandit did, in fact, resign) it was not the whole truth. When Pandit met with O’Neill on October 15 after the earnings were released, Pandit was told to choose from three news releases regarding his departure. Pandit’s options were to admit either that:
- Pandit had resigned, effective immediately;
- Pandit would resign, effective at the end of the year; or
- Pandit had been fired without cause.
Basically, O’Neill and Citigroup lied to the public, which immediately aroused the SEC’s suspicion. Rule 10b-5 of the Securities Exchange Act of 1934 specifically prevents such company dishonesty, and Citigroup’s dishonesty triggered an informal investigation.
SEC chairman Harvey Pitt told CNBC that, “[i]f the Board pushed Pandit out, then Citigroup issued a false statement…the reason for the CEO’s 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’t do that.” Let’s dig a little deeper into this charge. Rule 10b-5 states, summarily, that, “[i]t shall be unlawful for any person, directly or indirectly…to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made…not misleading.” A material fact is a fact that a reasonable investor or shareholder would consider essential to make an informed decision to buy or sell a company’s stock. Mr. Pitt is essentially saying that if Pandit didn’t 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’s Michael O’Neill omitted the true reason for Pandit’s departure made his statement that Pandit resigned on his own terms misleading and a possible violation of Rule 10b-5.
If the SEC finds that there has been a violation of Rule 10b-5, they can bring a civil enforcement action. 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, “10b or not 10b? That is the question.”