Judge Says Citibank's $285 Million Settlement with SEC is 'Neither Reasonable, Nor Fair, Nor Adequate, Nor in the Public Interest'

NYC Judge Rejects $285M SEC-Citigroup Agreement

November 28, 2011

CBS/AP - A federal judge on Monday struck down a $285 million settlement that Citigroup reached with the Securities and Exchange Commission, saying he couldn't tell whether the deal was fair and criticizing regulators for shielding the public from the details of what the firm did wrong.

U.S. District Judge Jed Rakoff said the public has a right to know what happens in cases that touch on "the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives." In such cases, the SEC has a responsibility to ensure that the truth emerges, he wrote.

Rakoff said he had spent hours trying to assess the settlement but concluded that he had not been given "any proven or admitted facts upon which to exercise even a modest degree of independent judgment." He called the settlement "neither fair, nor reasonable, nor adequate, nor in the public interest."

The SEC had accused the bank of betting against a complex mortgage investment in 2007 -- making $160 million in the process -- while investors lost millions. The settlement would have imposed penalties on Citigroup even as it allowed the company to deny allegations that it misled investors.

The SEC allowed the consent judgment settling the case to be filed the same day it filed its lawsuit against Citigroup, the judge noted.

"It is harder to discern from the limited information before the court what the SEC is getting from this settlement other than a quick headline," the judge wrote.

"In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers," Rakoff said. "Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances."

CBS Radio News senior legal analyst Andrew Cohen reports the rejection doesn't necessarily mean the deal is dead. But it does mean that both sides will have to offer more information, and Citibank may have admit to more than it was previously willing to admit.

Cohen says this is bad news for Citigroup, which now has to prepare for trial -- Rakoff set a date for July 18 -- or figure out settlement language that satisfies this judge, and it is bad news for the SEC, which will have to work harder in this case and in similar white-collar cases to secure settlements that can withstand judicial scrutiny.

Citi said it was reviewing the decision and declined to comment.

SEC Enforcement Director Robert Khuzami said in a statement Monday that Rakoff made too much out of the fact that Citigroup was not required to admit any wrongful conduct in the deal. Khuzami said forcing Citigroup to give up its profits and the imposition of financial penalties and mandatory business reforms outweigh the absence of an admission.

In the civil lawsuit filed last month, the SEC said Citigroup Inc. traders discussed the possibility of buying financial instruments to essentially bet on the failure of the mortgage assets. Rating agencies downgraded most of the investments just as many troubled homeowners stopped paying their mortgages in late 2007. That pushed the investment into default and cost its buyers' -- hedge funds and investment managers -- several hundred million dollars in losses.

Earlier this month, Rakoff staged a hearing in which he asked lawyers on both sides to defend the settlement.

At the hearing, Rakoff questioned whether freeing Citigroup of any admission of liability could undermine private claims by investors who stand to recover only $95 million in penalties on total losses of $700 million.

This wasn't the first time that the judge struck down an SEC settlement with a bank, and he has made no secret of his disdain for settlements between the government agency and banks for paltry sums and no admission of guilt.

"The SEC's longstanding policy -- hallowed by history, but not by reason -- of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact," he wrote in Monday's decision.

In 2009, Rakoff rejected a $33 million settlement between the SEC and Bank of America Corp. calling it a breach of "justice and morality." The deal was over civil charges accusing the bank of misleading shareholders when it acquired Merrill Lynch during the height of the financial crisis in 2008 by failing to disclose it was paying up to $5.8 billion in bonuses to employees even as it recorded a $27.6 billion yearly loss.

In February 2010, he approved an amended settlement for over four times the original amount, but was caustic in his comments about the $150 million pact, calling it "half-baked justice at best." He said the court approved it "while shaking its head."

Citigroup's $285 million would represent the largest amount to be paid by a Wall Street firm accused of misleading investors since Goldman Sachs & Co. agreed to pay $550 million to settle similar charges last year. JPMorgan Chase & Co. resolved similar charges in June and paid $153.6 million.

All the cases have involved complex investments called collateralized debt obligations. Those are securities that are backed by pools of other assets, such as mortgages.

Rakoff's ruling Monday was the latest in a series of setbacks for the SEC under the leadership of Chairman Mary Schapiro. Rakoff has said he doesn't believe the agency has been sufficiently tough in its enforcement deals with Wall Street banks over their conduct prior to the financial crisis.

The SEC told Rakoff recently that $285 million was a fair penalty, which will go to investors harmed by Citigroup's conduct, and that it was close to what the agency would have won in a trial.

Judge Blocks Citigroup-SEC Settlement

November 29, 2011

Reuters - A federal judge angrily threw out Citigroup Inc's proposed $285 million settlement over the sale of toxic mortgage debt, excoriating the top U.S. market regulator over how it reaches corporate fraud settlements.

U.S. District Judge Jed Rakoff in Manhattan said that in agreeing to the settlement, the U.S. Securities and Exchange Commission appeared uninterested in actually learning what Citigroup did wrong. He also said the regulator erred by asking him to ignore the interests of the public.

"An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous," Rakoff wrote in an opinion dated Monday.

"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," he added.

Rakoff called the settlement "neither reasonable, nor fair, nor adequate, nor in the public interest," and said it was hard to tell whether by settling the SEC was getting more than "a quick headline." He set a trial date of July 16, 2012.

Monday's decision throws into question the SEC's policies toward settlements with publicly traded companies, at a time when the regulator is trying to burnish its reputation for tough enforcement amid skeptics in Congress and elsewhere.

Many SEC cases against Wall Street banks and investment firms are settled out of court, without any admission or denial of wrongdoing. The absence of agreed-upon facts can make it harder for shareholders, bondholders and others to bring their own civil lawsuits against those same defendants.

THORN

Both the SEC and Citigroup on Monday maintained that the settlement was reasonable.

[...]

In its complaint, the SEC accused Citigroup of selling a $1 billion mortgage-linked collateralized debt obligation, Class V Funding III, in 2007 as the housing market was beginning to collapse, and then betting against the transaction.

The SEC said the CDO caused more than $700 million of investor losses. One Citigroup employee, director Brian Stoker, was charged by the SEC, and is contesting those charges.

[...]

'POCKET CHANGE'

Rakoff called the Citigroup accord too lenient, and noted that the bank was charged only with negligence. Private investors cannot bring securities claims based on negligence.

"If the allegations of the complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business," the judge wrote.

The settlement would have required the third-largest U.S. bank to give up $160 million of alleged ill-gotten profit, plus $30 million of interest.

It also would have imposed a $95 million fine for the alleged negligence, less than one-fifth what Goldman Sachs Group Inc paid last year in a $550 million SEC settlement over a different CDO.

Rakoff called the $95 million fine "pocket change" for Citigroup and said investors were being "short-changed."

Khuzami said the regulator will review the ruling and "take those steps that best serve the interests of investors."

In striking down the SEC's $33 million settlement with Bank of America over Merrill, Rakoff said it unfairly punished shareholders. He later approved a $150 million accord.

Citigroup shares closed 6 percent higher at $25.05 on Monday. Stocks rose broadly on optimism that leaders in Europe might take steps to address the region's debt crisis.

The case is SEC v Citigroup Global Markets Inc, U.S. District Court, Southern District of New York, No. 11-07387.