Citigroup Inc.'s $285 million settlement with the U.S. Securities and Exchange Commission over mortgage-backed securities was rejected by federal judge who said he hadn't been given enough facts to approve it.
U.S. District Judge Jed Rakoff in Manhattan rejected the settlement in an opinion released today and set a trial date. He has criticized the SEC's practice of letting financial institutions such as New York-based
Citigroup settle without admitting or denying liability.
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, as could a new settlement that includes admissions by the bank.
“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.
Trial Date
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. The parties may try to reach a revised settlement, which must be approved by Rakoff to take effect.
At a hearing this month, Rakoff asked whether the public interest doesn't require determining whether Citigroup did what the SEC claims. Matthew Martens, the SEC's chief litigation counsel, told Rakoff that the agency adopted its policy of allowing settlements without admission or denial of liability in 1972 to avoid having defendants claim publicly they hadn't done anything wrong after agreeing to settle.
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, said Mark Fickes, a former senior trial counsel at the SEC and now a partner at BraunHagey & Borden LLP in San Francisco.
Avoid Uncertainty
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, Fickes said before Rakoff's opinion was released.
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.
“If the allegations of the complaint are true, this is a very good deal for Citigroup,” Rakoff wrote in today's opinion. “Even if they are untrue, it is a mild and modest cost of doing business.”
Rakoff said he can't endorse the settlement based only on the unproved allegations in the SEC's complaint.
“The court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment,” he said.
‘Recidivist'
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.
“When a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are,” he wrote.
--Bloomberg News--
