Judge Calls SEC on Allowing Settlements that do NOT address liability
— Content from Bloomberg and SEC websites
At question was Citigroup Inc.’s $285 million settlement with the U.S. Securities and Exchange Commission over mortgage-backed securities. The federal judge rejected on grounds that he does not have enough facts.
U.S. District Judge Jed Rakoff in Manhattan rejected the settlement – he criticized the SEC’s practice of letting financial institutions such as Citigroup settle without admitting or denying liability.
The SEC claimed that Citigroup misled investors in a $1 billion fund that included assets the bank had projected would lose money. At the same time it was selling the fund to investors, Citigroup took a short position in many of the underlying assets, according to the agency.
Citigroup, the third-biggest U.S. lender, agreed last month to settle a claim by the SEC that it misled investors in a $1 billion CDO linked to subprime residential mortgage securities. Investors lost about $700 million, according to the agency. A trial could establish conclusions that investors could use against Citigroup.
“In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth,” Rakoff wrote in the opinion. The proposed settlement is “neither fair, nor reasonable, nor adequate, nor in the public interest,” he said.
Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment pending a review of the decision. SEC spokesman John Nester declined to comment immediately on the ruling.
Rakoff today consolidated the case with another SEC suit involving former Citigroup employee Brian Stoker and scheduled the combined case for trial on July 16, 2012.
Citigroup doesn’t want to formally admit liability because of the bad publicity that would follow and because an admission would give a powerful tool to investors suing the bank.
Allowing a bank to pay a fine without admitting liability allows the SEC to avoid the uncertainty of a trial and preserves resources that can be used to pursue other securities law violators.
He rejected the SEC argument that he should defer to the agency’s determination that the settlement is fair, particularly as it asked him to issue an order requiring Citigroup not to violate the securities laws in the future.
Calling Citigroup “a recidivist,” Rakoff said the SEC hasn’t tried to enforce such an order against a financial institution in the past 10 years.
—Bloomberg News and SEC response at http://www.sec.gov/news/speech/2011/spch112811rk.htm
Edi Alvarez, CFP®
BS, BEd, MS