Why a Federal Judge Trashed the SEC’s Settlement With Citigroup

Why a Federal Judge Trashed the SEC’s Settlement With Citigroup

by Marian Wang ProPublica

When the Securities and Exchange Commission struck a deal with Citigroup over a failed security that the bank sold to investors, we asked whether regulators had handed Citigroup too sweet of a deal [1].

Today in Manhattan, U.S. District Judge Jed Rakoff appeared to reach that very conclusion: “If the allegations of the Complaint are true, this is a very good deal for Citigroup,” Rakoff wrote as he refused to sign off [2] on the $285 million proposed settlement agreement.

While the full opinion is worth a read [2], here’s a summary of the judge’s objections:

The allegations brought by the SEC don’t match the charges.

The SEC, in its complaint, alleged that Citigroup knowingly misrepresented or failed to disclose to investors key information about the CDO, known as Class V Funding III. We first reported on Class V last year, in our story on CDO self-dealing [3], noting that the CDO contained risky pieces of other Citigroup CDOs.

Specifically, the SEC charged that Citi put risky assets into the deal, bet against it, and then didn’t disclose that to investors. According to SEC, “Citigroup knew it would be difficult” to sell the CDOs if it disclosed all that to investors.

Judge Rakoff concluded [4], “This would appear to be tantamount to an allegation of knowing and fraudulent intent.”

But in the end, the SEC only charged Citigroup – and one low-level exec – with negligence – a lower standard of proof than intentional fraud. Charges were also not filed against other, more senior Citi execs who, according to the SEC, also knew details of the deal.

The boilerplate language in the settlement that forbids future violations by Citigroup is essentially meaningless.

“By the S.E.C.’s own account, Citigroup is a recidivist,” wrote Rakoff, who noted that the SEC had not sought to enforce that prohibition for at least a decade.

The context here is more than adequately explained [5] by a recent New York Times article that found that Citigroup had agreed on at least four other occasions not to violate that same anti-fraud statute, only to continually break that promise.

The fine is too modest to have a deterrent effect.

According to Rakoff, the fine in this case is so mild that it’s more or less “pocket change to any entity as large as Citigroup” and starts becoming just a cost of doing business.

Rakoff loathes the longstanding tradition of reaching settlements without any admissions of wrongdoing.

Sure, it’s standard in these types of settlements, and judges have routinely signed off on such language, but Rakoff has signaled in the past that he has serious qualms about these non-admission, non-denial settlements.

For one, he says the deal with Citi shortchanges investors, who according to the SEC lost more than $700 million: With no mea culpa from Citi, private investors have a much harder time bringing their own lawsuits against the company – which for Citigroup is precisely the point.

Rakoff also argues that the tradition cheapens judicial power, which must be used in conjunction with “cold, hard, solid facts.” A non-admission of guilt but agreement to pay, while in keeping with established tradition, denies the court of established facts on which to decide whether the settlement is reasonable, he said.

The truth should come out

Finally, Rakoff argues that especially when it comes to the financial sector – and especially now – the public deserves to know the truth: “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.”

One thing Rakoff didn’t touch on? A discrepancy we raised last month [1]: Citigroup seems to believe this deal with the SEC would have settled all of its potential liability over CDOs – something the agency denied.

The SEC’s response

The SEC issued a statement today defending its settlement: “We believe that the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial,” said Robert Khuzami, the SEC’s head of enforcement.

Khuzami pointed out that Rakoff’s objection to the lack of admission of guilt “ignores decades of established practice throughout federal agencies and decisions of the federal courts.”

That response is in line with what Khuzami has said in the past – that securing corporate confessions from companies like Citi, while ideal, would slow down the agency’s investigations.

“No one disagrees with the sort of abstract notion that you’d like to have admissions in your cases,” Khuzami said earlier this month [6]. “One has to make choices between competing demands.”

The agency has also argued that taking banks to costly trials would divert scarce resources toward their other securities fraud fighting efforts, and be counterproductive.

What’s next?

The case has been scheduled for trial next year – something Citigroup would presumably like to avoid, given the mountains of evidence in the SEC’s possession that would become public should the case indeed go to trial.

But a trial is still not a sure thing. Rakoff initially rejected a proposed SEC settlement with Bank of America, but he eventually approved the deal [7] last year after the agency came back with a bigger fine. It’s unclear if the SEC will try to do the same this time around.



12 Responses to “Why a Federal Judge Trashed the SEC’s Settlement With Citigroup”
  1. kravitz says:

    And, oh yeah….

    SEC, Citi fight CDO settlement rejection

    “Khuzami said they did provide enough facts. One CDO trader allegedly characterized the Class V III portfolio as “dogs–t” and “possibly the best short EVER!” in an internal message obtained and provided by the SEC in the case. Khuzami added the reforms and penalties for Citi outweigh any admission of guilt.

    However, investors armed with such an admission could go after the bank individually in court to collect more of their losses.”

  2. kravitz says:

    The SEC has asked Congress to allow it to force higher penalties. Chip Reid’s CBS News report broke this last night, having gotten the letter moments before live air. Haven’t found the letter online.


    “Fines against individuals would be capped at $1 million per violation instead of $150,000 and penalties for firms could rise to $10 million from $725,000 for each act under a proposal included in a letter dated yesterday from SEC Chairman Mary Schapiro to Senator Jack Reed, the Rhode Island Democrat who leads a subcommittee that oversees the agency.”


    “Ms. Schapiro’s letter asks Sens. Jack Reed (D., R.I.) and Mike Crapo (R., Idaho), to increase the legal formulas by which the agency calculates financial penalties. The senators hosted a hearing this month on the issue of SEC structural overhauls.”

  3. lvent says:

    I was just listening to Laurie Goodman of Amherst Securities talk about the “shadow inventory” in the housing market …She claims the FIX FOR ALL OF THE FRAUD IN THE HOUSING MARKET IS the STOLEN HOMES must be BUNDLED UP AND SOLD OFF TO FOREIGN INVESTORS in order to clear out the market……….HER FIX IS TO COMMIT MORE FRAUD AND KEEP THE RACKET MOVING!!!!!!! She ought to go trim her hairy eyebrows and put on some lipstick and then go get deprogrammed…she is a sick puppy…

  4. LVLawman says:

    The problem that arises here is that instead of having two parties in adversarial positions before a neutral arbiter of procedure and law, we now have to allies fighting the neutral.

    Unfortunately, the victims ALWAYS get shortchanged in these governmental enforcement actions. The only consideration of the non-party victims in our legal system is that they are merely EVIDENCE.

    If this is what we get from the all powerful federal government whom has unlimited resources, what can we expect from our attornies general?

  5. CaitlinO says:

    I hope Judge Rakoff’s guardian angels are working overtime right about now. He’s breaking the rice bowls of some very powerful people who, I suspect, wouldn’t mind at all if the good judge ended up under a bus.

  6. kravitz says:

    Khuzami: Rakoff Ruling Ignores ‘Decades of Established Practice’

    He’s the SEC’s head cop. Basically.

    Settling’s fast, cheap, easy. And we’ve always done it this way. Why change it?

    Now all Judge Rakoff may really want is details on the deal. If the problem is $700 Million, and there’s an employee named, and Credit Suisse is involved…why did the SEC have a goal of $300 million, which Citi probably knew. Why not actually go for the $700 and add fines on top of that? Yeah, would take longer, but add the SEC’s costs into the total penalty. Sounds logical.

    • lvent says:

      Sounds like another cover-up. I even find it hard to believe that the SEC would have to sue them…I think it is all a show and in the end the money will stay among the hands of the criminals….If the SEC did their job in the first place, none of this would have, could have, or should have ever happened. At the end of the day, they are all corrupt criminals working for their owners who instituted the plan to screw everybody out of everything….

  7. jaclyn says:


  8. lvent says:

    Ah, the poor investors…If homeowners would have known what they were really doing with the mortgages and notes, which was setting us all up to fail, we would have not invested in their fraud either..The judge did the right thing but, what about the homeowners and small business owners…? THE U.S. TAXPAYERS INVESTED THE MOST IN THIS PONZI SCHEME!!!! This was the biggest investment most of us would ever make, this was our livelihoods in our businesses, our retirement money and our pension money too… yet no one is fighting for homeowners or small business owners…It is a disgrace!

    • I agree! And they are of the know of this. I yellowmarkered (highlighted ) all the high points of a 650 page document for the Senate that I was told by a customer of mine, whom is the secretary for Senator Pam Roach, that it was to big an article for her to read, she would not read it. So I asked her if she would read the highlighted parts herself and give the most important info to senator Pam Roach. She did and came personally to pick it up from me. Pam Raoch is working with a group of people I know one of them, that is suppose to be putting a bill together, that I have not seen yet and it is most urgent as we all know. Now how come the tax payers pay thousands if not millions for a 650 page Senate Report that the Senators wont read? See “Wall Street and THe Financila Crisis,; Anatomy of A Financial Collaspe”. this report should put all these Senators in disgrace alone, if they choose to proytect the banksters and not the victimes. This report should put the mobsters in jail and give us relief for our incomes lost, businesses, homes, jobs. It has been out for months. In my case I have asked for all this relief. We will see what happens. It is in the Appeal Court by Pro Se. As you say it is bad enough people are being tossed from their homes, to add the lost jobs, businesses and children and their famiilies living in the streets and death related crimes. This is just unimaginable to have ever happened in this country. Americans have to wake up and fight this in every way they are able to by non violence. They are just waiting to do something bad by provoking violence and then we will all be in deeper trouble. The evil doers want us to become violent, so they will have their way with us. So far it is the government that has been violent. Shame on all of them. Has anyone heard how Scott is? the military man whom was shot in the head. I pray for him and all of us..

  9. It’s enlightening to see a Judge that has morals and honesty and justice as his goal in life and calls it as he sees it. Like this one and Judge Schack and a few others. Yeah for Judge Rakoff. The banksters and their croanies, be it politicians or bankers or employees, volunteers and contracted parties, they need to pay dearly for what they have done to families being tossed into the streets and the rip off of the wealthy, middle class and the poor. A slap on the hand is a slap on America and the familes in their cars, and on the streets. Justice has to be done! Thankyou Judge Rakoff

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