A federal judge in New York blasted the Securities and Exchange Commission Monday for failing to act in the “public interest” in connection with Citigroup’s alleged abuses in the housing market.
As a result, U.S. District Judge Jed S. Rakoff rejected the proposed $285 million deal between the SEC and Citigroup. He issued his 15-page ruling Monday.
Rakoff scolded the SEC, saying it “ought to always be required to serve the public interest.” The judge went on to point out the proposed deal is worth much less than the $700 million lost by investors in this case. He added Citi, while agreeing to pay a fine, has not admitted to any wrongdoing.
“If the allegations in 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.” Rakoff said. Rakoff pointed out part of the proposed fine is “pocket change” and he highlighted SEC claims that Citigroup is a "recidivist" – accused of committing other abuses in the past.
Citi is accused of knowingly dumping dubious mortgage assets into one billion-dollar portfolio and then misleading investors about the quality of those assets. Investigators alleged Citi officials then bet against the very assets they were selling and earned more than $160 million in profits.
Citigroup lawyers have denied any wrongdoing. They have told the judge they will “fully contest the facts” in any litigation.
Citi said in a statement that it disagrees with the ruling and believes the settlement "is a fair and reasonable resolution" that "fully complies with long-established legal standards."
The SEC issued a statement saying it struck the deal because it wanted to obtain disgorgement, monetary penalties and reforms from Citi without risks and delay of a trial.
The SEC said in its view, the deal was "fair" and "in the public interest." The SEC said it sought to recover close to $300 million and give that money to investors who were hurt. They added the SEC does not have the power “to recover investor losses” in full. Citigroup is facing separate civil suits by investors.
But Rakoff complained he cannot sign off on a deal where he does not know the facts. And he said the SEC filed what amounted to an “allegation of knowing and fraudulent intent” but they instead “chose to charge Citigroup only with negligence.”
The SEC has a history of making deals with banks where fines are paid but the corporation neither admits nor denies wrongdoing. Rakoff said the courts need facts, otherwise the “public is deprived of ever knowing the truth in a matter of obvious public importance.”
An SEC spokesman said the agency is reviewing the court’s ruling and will “take those steps that best serve the interests of investors.”
