Tuesday, November 29, 2011

Judge Rakoff Rejects Citigroup's $285 Million Settlement With the SEC

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.


  1. Salwa (Memphis Law)November 29, 2011 at 4:56 AM

    I agree with Judge Rakoff’s decision in rejecting the settlement. As with the Goldman Sachs situation, this is a breach of fiduciary duties and a classic misrepresentation case. The fact that the S.E.C. settles most cases without involving much admission of liability by the defendant proves the seriousness of wrongdoing that has Judge Rakoff upset, leading him to reject the settlement because it “is neither fair, nor reasonable, nor adequate, nor in the public interest.”

  2. I agree with Salwa that Judge Rakoff made the right decision in rejecting the SEC settlements with Citigroup on grounds that settlement did not shed any light on the nature of any wrongdoing that Citigroup had committed in the trade and marketing of CDO. Not only would a trial increase the public's knowledge of the cause of the economic downturn but the willingness of Citigroup to settle for this high sum would seem to indicate that they believe that the value of settling would ultimately be less costly than litigating the charges, either because of length of trial or ill will that will be generated by discovery. However I am concerned that the judge did not reject the Goldman settlement, which was significantly larger, despite the fact that it appeared that the infractions were similar. This might send the message that banks can buy there way out of public scrutiny as long as they are willing to pay fines high enough.

  3. Jessica S - Memphis LawNovember 29, 2011 at 11:42 AM

    I also agree that Judge Rakoff made a good decision here. It seems like large corporations often dupe the public and their investors with false information and repeated fiduciary violations. I am glad that Rakoff is sending the message that they need to held accountable for their conduct. However, I also agree with Tom's concern about sending the message that they can buy their way out if they will put up enough money. The trouble I see is that these companies typically have the money (as Rakoff suggests) and if we let them off the hook time and time again, they will continue giving their investors false information because ultimately they are still gaining from it. I think that it would be good for the public to see more clearly what they are doing because essentially they are taking money from their investors and never having to pay it back. Also, as a side comment, I think the way employees for these companies speak about fooling their investors is ridiculous. To knowingly refer to the CDO as dogshit and then put it out to investors as a really sound financial decision is just crooked and I think something like this should go to trial so people will think twice before investing in a company whose employees treat them as toys they can manipulate however they please.

  4. Brigid W (Memphis Law)
    Citigroup has cheated its investors, and in turn screwed the American people royally. While they are not the only ones to do so, I firmly believe that holding Citigroup accountable before a jury of American citizens is exactly the right thing to do.

  5. Fully prosecuting a huge corporation such as Citigroup would prove very costly. However, I think that a "back-room" settlement deal would not be transparent enough for many. It is important to retore confidence in the American economy. I think that a trial of this magnitude could go a long way in re-convincing investors that the American economy is a safe place to invest, and that those who take advantage of others will be held accountable.

  6. Melissa T (Memphis Law)November 29, 2011 at 12:31 PM

    I completely support Judge Rakoff's decision. If a company can defraud its investors then simply throw money at the SEC to make the problem go away, there is no protection for the investors and no incentive to play by the rules if you have enough money.

  7. Isn't the point of settlement to avoid the entire costs of damages that would be awarded in judgment against the defendant?

    While I agree that it's pocket change to the corporation, I think that the cost to taxpayers of having this drag on for years, until at some point it's just not relevant anymore... What people want is to see is a punishment--some type of punishment. Most people aren't sophisticated enough to realize that this amount is...hooey.

    It might be at the point where we just need a resolution.

    Overall, I support Judge Rakoff--but I can see why people might have other opinions.

  8. Interesting how the verdict is already in among the commentators on this blog. Or, for that matter, Judge Rakoff, who, absent any admission of guilt or wrong doing, simply assumes that the $95 million deal favors Citigroup. No, Citigroup is guilty - without having been tried - and the only question is how much more they will have to pay after their "come to Jesus" moment.

    Apparently the SEC - an agency with a long history of regulatory incompetence - has got this case all sewed up. I doubt it. The SEC settles cases, like this one, and in this manner, in order to avoid going to trial where their buffoonery generally finds itself on full display.

  9. I am glad to see someone in a position of power take a stand like this. We need more people like Judge Rakoff to use their positions of power to achieve justice. The "white collar" fraud that has depressed the United States and world economies needs to be rectified, and measures need to be put in place to prevent such a large disaster from being perpetrated. Bringing the fraud to light instead of having matters settled behind closed doors is an important step. Imposing effective punishments (great enough financially or extreme enough criminally) is another. Too many politicians are caught up with lobbyists' agendas, and many of the lobbyists call Wall Street their day job. Hopefully, with our country's system of checks and balances, actions like Judge Rakoff's will spur the judiciary to take the lead in rooting out the injustice that has brought economic suffering to so many because of so few.

  10. "I worry about "experts" who go unchallenged by public scrutiny", from the book "Telling Lies" by Paul Eckman