Why a Federal Judge Trashed the SEC’s Settlement With Citigroup - ProPublica
by Marian Wang
ProPublica, Nov. 28, 2011, 4:48 p.m.
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 a deal.
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 on the $285 million proposed settlement agreement.
While the full opinion is worth reading, here’s a summary of the judge’s objections:
The SEC’s allegations 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 collateralized debt obligation, or CDO, known as Class V Funding III. We first reported on Class V last year in our story on CDO self-dealing, 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 didn’t disclose that to investors. According to the SEC, “Citigroup knew it would be difficult” to sell the CDOs if it disclosed all that to investors.
Judge Rakoff concluded, “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, for which there’s a lower standard of proof than for intentional fraud. Charges were not filed against more senior Citi execs who, according to the SEC, also knew details of the deal.
The settlement’s boilerplate language forbidding 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 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 “pocket change to any entity as large as Citigroup” and amounts to just a cost of doing business.
Rakoff loathes the longstanding practice of reaching settlements without admissions of wrongdoing.