Top 10 Scandals, Arrests, Lawsuits and Settlements that Rocked the Financial World in 2011

"Madness is badness of spirit, when one seeks profit from all sources." -- Aristotle

For those who like juicy scandals, surprising arrests, bold-faced lawsuits and outsized settlements in the financial world, it has been a banner year. Here's a look back at ten of the stories that will make you happy that 2011 is coming to an end.

1. Former Citigroup Vice President Arrested for Embezzling $19 Million

United States Attorney Loretta E. Lynch called it "the ultimate inside job." In June, Gary Foster, a former vice president in Citigroup's treasury finance department, was arrested on bank fraud charges stemming from his embezzlement of more than $19 million. The government has accused Foster of transferring money from several Citigroup accounts to the bank's cash account before moving it to his personal account at another bank. If convicted, Foster faces up to 30 years in jail.

2. Estimated $20 Billion to Settle Foreclosure Fraud

In June, Associate U.S. Attorney General Tom Perrelli said that America's biggest mortgage companies expect to pay up to $20 billion to settle claims of widespread foreclosure abuse. The five firms in the government's crosshairs are Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, all accused of violating the False Claims Act, defrauding taxpayers in their management of foreclosures on homes bought with Treasury-backed loans. Federal audits revealed that the banks lied to the Federal Housing Adminstration, filing for federal reimbursement on foreclosed homes with false claims.

"Flawed mortgage banking processes have potentially infected millions of foreclosures, and the damages to be assessed against these operations could be significant and take years to materialize," said FDIC Chairman Sheila Bair in testimony given to the Senate Banking Committee in May.

3. Peter Diamond Withdraws Nomination to Fed Seat

Washington Post columnist E.J. Dionne Jr. called it "the scandal that no one is talking about." In June, after more than a year fighting to get a seat on the Federal Reserve Board, President Obama's nominee, Peter A. Diamond -- a Nobel laureate in economics and professor at MIT -- withdrew his name, citing intractable Republican opposition. The obstruction was led by Senator Richard Shelby (R-Ala.), the ranking GOP member on the Senate Banking Committee.

Dionne said that this "partisan obstruction...ought to be the cause for real outrage about how broken our government is. It's hardly making a ripple...Republicans in the Senate have gone even further than oppositions have in the past in using the filibuster to block the president's policies by obstructing his appointments. And they are paying no price for it. On the contrary, they know perfectly well that Obama will get all the blame if his economic policies falter."

4. Accounting Scandals Embroil American-listed Chinese Firms

In June, Reuters reported on a rash of accounting scandals at Chinese companies listed in U.S. markets, including China Electric Motor, Longtop Financial Technologies and China Electric. And though U.S. regulators -- who have the power to suspend or delist companies' shares but cannot punish Chinese executives -- have pressured their Chinese counterparts to crack down on accounting fraud in their country, the calls have fallen on deaf ears.

"There's been no evidence that Chinese regulators are paying much attention to this stuff at all," said Paul Gillis, a visiting professor at Peking University and author of the China Accounting Blog.

"U.S. investor appetite for tapping into China's huge economic potential is starting to sour as scepticism grows about the veracity of many of these companies' financial records," reported Reuters.

5. Insider Loans Drain Kabul Bank of Almost $1 Billion

The Guardian reported in June that almost $1 billion had disappeared from Kabul Bank in Afghanistan in "mysterious insider loans." In his report, Jon Boone wrote that "in relative terms given Afghanistan's tiny economy, the biggest bank collapse in history." It is a scandal that has made the nation's recovery much more difficult, as foreign donors have refused to donate further aid until the International Monetary Fund is satisfied with the ultimate resolution.

The mystery loans drained the savings and interest on those savings of thousands of depositors for a total of $910 million in what Boone described as "a binge of insider lending by the bank's politically powerful shareholders," noting that "in a country where GDP is just $12bn, that is an extraordinary figure."

6. Deloitte Sued for $7.6 Billion for Failing to Detect Fraud

Two lawsuits were filed in September claiming that Deloitte & Touche, one of America's biggest accounting firms, should pay $7.6 billion in damages for failing -- through many years of audits -- to detect fraud at Taylor Bean & Whitaker, a now-defunct Florida-based mortgage company. "They certainly did not do their job," said the plaintiffs' attorney Steven Thomas.

Filed by the Taylor Bean bankruptcy trustees and Ocala Funding, a firm that purchased hundreds of millions of dollars' worth of Taylor Bean's mortgages, the suits seek to remunerate Taylor Bean creditors. In June, former Taylor Bean chairman Lee B. Farkas was sentenced to 30 years in federal prison.

"The bizarre notion that his engines of theft are entitled to complain of injury from their own crimes and to sue the outside auditors they lied to defies common sense, not to mention the law," said Deloitte spokesman Jonathan Gandal.

7. UBS Director Arrested for Rogue Trading that Cost the Bank $2.3 Billion

Kweku Adoboli, a director of the UBS Global Synthetic Equities Trading team in London, was arrested in September on charges of fraud in connection with alleged rogue trading that cost the Swiss bank $2.3 billion. UBS shares plunged nearly 10% after the news. Within weeks, CEO Oswald Gruebel resigned "to assume responsibility for the recent unauthorized trading incident," according to a UBS staff memo. In October, it was revealed that the UBS computer system detected the fradulent trades, but nothing was done about the warning.

8. Olympus Admits to Massive Accounting Cover-Up

The Wall Street Journal called it "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history." In November, Olympus Corp. announced that the company concealed its investment losses for decades, engaging in a series of acquisitions to rectify its books. The announcement followed the ousting in October of British-born CEO Michael Woodford, the firm's first non-Japanese chief, after he questioned why the 92-year-old camera manufacturer paid inordinately large amounts for obscure companies.

9. Federal Judge Blocks Citigroup's $285 Million Mortgage Settlement

In a ruling that will likely affect the Securities and Exchange Commission's predilection for settling out of court, Judge Jed S. Rakoff of United States District Court in Manhattan in November threw out a settlement for $285 million that would have been paid by Citigroup to settle SEC charges that the bank deceived clients in a 2007 mortgage derivatives deal.

"An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous," wrote Judge Rakoff in his 15-page ruling, referring to the lack of agreement on factual information regarding the case. "The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts -- cold, hard, solid facts, established either by admissions or by trials -- it serves no lawful or moral purpose and is simply an engine of oppression," he wrote. Ultimately, Rakoff's decision pointed a finger at the SEC, which had not sufficiently proven that Citigroup committed fraud.

10. Bank of America Settles Lending Discrimination Suit for $355 Million

In December, Bank of America agreed to pay a settlement of $355 million to resolve allegations by the Justice Department that Countrywide Financial Corporation, which BofA purchased in 2008, "engaged in a widespread pattern or practice of discrimination against qualified African-American and Hispanic borrowers in their mortgage lending from 2004 through 2008." It was the Department of Justice's biggest-ever residential fair lending settlement.

"The department's action against Countrywide makes clear that we will not hesitate to hold financial institutions accountable, including one of the nation's largest, for lending discrimination," said Attorney General Eric Holder. "These institutions should make judgments based on applicants' creditworthiness, not on the color of their skin....more than 200,000 African-American and Hispanic borrowers who were discriminated against by Countrywide will be entitled to compensation." While the settlement is historic, the amount isn't that much for Bank of America, which made $6.2 billion tax-free dollars in Q3 profits.

So, there you have it. Ten things not to toast as the year comes to a close. As we reflect on 2011 and all the good, bad and ugly things that happened, I'd like to share a Native American proverb. A wise old man tells his young grandson that there are two wolves inside everybody, fighting each other for dominance. One is the wolf of peace, love and kindness. The other is the wolf of fear, greed and hatred. "Which wolf will win?" the grandson asks. His grandfather replies, "Whichever one you feed."

Here's to feeding our good wolves in 2012. Happy new year.

image credit: Abu badali (Wikimedia Commons)