Judge Blocks $285M Citigroup Settlement, Questions S.E.C Policy

A settlement agreement reached lastrnmonth between Citigroup and the Securities and Exchange Commission (S.E.C.)rnover a 2007 mortgage derivatives deal has been thrown out by a federal courtrnjudge who has ordered the case be sent to trial.  Under the settlement announced on October 19,rnCiticorp had agreed to pay $285 million to settle a civil suit arising out ofrnthe sale of $1 billion in mortgage-linked collateralized debt obligations.  The 2007 transaction took place just as thernhousing market was about to collapse, costing investors $700 million.  Citigroup is alleged to have handpicked the securitiesrnand simultaneously wagered that some of the mortgages would fail whilernprofiting by $160 million from the deal.</p

In a written statement Monday, JudgernJed S. Rakoff of the U.S. District Court in Manhattan, said that the proposedrnsettlement was “neitherrnreasonable, nor fair, nor adequate, nor in the public interest” becausernpermitting a company to neither admit nor deny the charges against it does notrnsatisfy the law.   The limited information offered in thernsettlement, he said, made it difficult to discern whether the S.E.C. wasrngetting anything from the settlement “other than a quick headline.” </p

Settling claims in such a manner hasrnbecome commonplace for the SEC and Rakoff said it “creates substantialrnpotential for abuse because it asks the court to employ its power and assertrnits authority when it does not know the facts.” </p

CitigrouprnDirector, Brian Stoker is contesting similar charges to those made againstrnCitigroup by the S.E.C.  Rakoff hasrnjoined the two cases and ordered a trial to begin on July 16, 2012. </p

Thernsettlement rejected by the judge would have required the bank to return thern$160 million in profits it received from the transaction, an additional $30rnmillion in interest, and pay a $95 million fine for its negligence.  Reuters points out this is less thanrnone-fifth the amount assessed against Goldman Sachs last year in a S.E.C.rnsettlement growing out of a similar transaction. </p

Rakoffrnsaid that if the allegations against the bank are true, the settlement was arnvery good deal for Citigroup.  </p

Neither the SEC nor Citigroup havernas yet commented on the judge’s decision.

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