A federal judge has once again rejected a proposed settlement between the Securities and Exchange Commission and one of the Wall Street titans that allegedly defrauded investors during the run-up to the financial market crisis of 2008. The Wall Street Journal reports "In a sharply worded order, U.S. District Judge Jed S. Rakoff rejected a $285 million deal by Citigroup Inc. to settle civil fraud charges filed by the Securities and Exchange Commission as 'neither fair, nor reasonable, nor adequate, nor in the public interest.'
The deal was agreed to earlier this year, after the SEC accused the New York company of selling investors slices of a $1 billion mortgage-bond deal called Class V Funding III, without disclosing it was betting against $500 million of those assets. Judge Rakoff, a vocal critic of SEC settlements, dismissed the . . . penalty Citi agreed to pay as 'pocket change' for a firm of its size."
In 2009, as detailed by Professor Joseph Grant previously on this blog, Judge Rakoff rejected a settlement between the SEC and Bank of America for its allegedly fraudulent activities leading up to the mortgage meltdown. In both instances, Judge Rakoff indicated in his rulings that the public was not being protected by these settlements and that the SEC was failing to uncover the truth behind each companies role in the financial crisis.
CNN reports: "Judge Jed Rakoff said that the settlement announced last month, under which Citi neither admitted nor denied the SEC's allegations, deprived the public 'of ever knowing the truth in a matter of obvious public importance.' He instead ordered Citi to face trial over the allegations in July 2012. '[I]n 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, a U.S. district judge in Manhattan, wrote in his decision."
In both the Bank of America settlement and the proposed Citigroup settlement, Judge Rakoff has chided the SEC for failing to protect the public by entering into "pocket change" settlements where the firms refuse to take responsibility for the alleged fraudulent activity.
In the case of Citigroup, the SEC alleged that Citi created and sold a collateralized debt obligation (CDO) consisting of securitized subprime mortgages that was described by its own traders and employees as an asset group that was "a collection of dogshit" and in other internal documents as "possibly the best short EVER!" However, in Citi's marketing material, the CDO was referred to as "an attractive investment rigorously selected by an independent investment adviser." After marketing the CDO as attractive, Citi then took a short position against the offering and as the housing market deteriorated, brought in a net profit of $160 million while investors lost more than $700 million on the CDO.
This allegation is similar to the one that Goldman Sachs was accused of and settled previously, in a settlement that gained the approval of Judge Rakoff.