Judge rejects $285M Citigroup settlement

A federal judge in Manhattan has rejected a $285 million settlement that the US Securities and Exchange Commission negotiated with Citigroup Inc. over a mortgage-bond deal, and has told the two parties to be ready to go to court in July 2012.

Judge Jed Rakoff said the arrangement the SEC had reached with Citigroup did not serve the public interest, the Los Angeles Times reported.

The SEC accused Citigroup in October of misleading investors by selling them mortgage-backed securities the bank then bet against, according to the LA Times. However, in exchange for coughing up a $285 million fine, Citigroup did not have to admit or deny those accusations.

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“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,” Rakoff wrote in the opinion. “The SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances.”

According to the LA Times:

The SEC has frequently dealt with wrongdoing in the financial industry through negotiated settlements in which the firms do not have to admit to the accusations. In his order today, Rakoff said that those settlements have not proven successful at preventing the banks from further wrongdoing.

In a statement, Robert Khuzami, the director of the SEC's Division of Enforcement, said the settlement "reasonably reflects the scope of relief that would be obtained after a successful trial,” the Wall Street Journal reported.

Khuzami added, "The court's criticism that the settlement does not require an 'admission' to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay and resources required at trial.”

According to Bloomberg Businessweek, a trial or a new settlement that includes an admission of wrongdoing could provide investors with arguments they could use in additional lawsuits against Citigroup.