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Tuesday, May 28, 2024 | Back issues
Courthouse News Service Courthouse News Service

Citigroup May Get to Settle With SEC After All

MANHATTAN (CN) - Citigroup will not face a trial on securities fraud charges until the 2nd Circuit decides whether the bank should have been allowed to settle with financial regulators for "pocket change."

The Securities and Exchange Commission accused Citigroup in October of selling $1 billion in mortgage-backed CDOs while secretly shorting the securities, which one Citigroup trader allegedly called "a collection of dogsh!t."

Within weeks, the parties agreed to settle for $285 million, with $95 million going to the victims.

But U.S. District Judge Jed Rakoff put the kibosh on that settlement, which he described on Nov. 28 as "pocket change" for the megabank. He also ripped regulators for allowing Citigroup to settle the case without admitting wrongdoing.

"Here, the S.E.C.'s long-standing policy - hallowed by history, but not by reason - of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact," Rakoff wrote.

"An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous," he added. "The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts - cold, hard, solid facts, established either by admissions or by trials - it serves no lawful or moral purpose and is simply an engine of oppression."

SEC enforcement director Robert Khuzami announced that the agency would appeal the decision because Rakoff allegedly committed a "legal error."

"We believe the court was incorrect in requiring an admission of facts - or a trial - as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions," Khuzami said in a Dec. 15 statement.

Pending that appeal, Citigroup and the SEC asked Rakoff to stay the trial from moving into discovery.

Though Rakoff declined to grant the stay on Tuesday, calling the parties' motions "patently defective," the 2nd Circuit overruled him later in the day.

The order halts discovery on the case until a motions panel decides whether the parties can settle as originally planned.

Before it was stayed, the case was scheduled to go to trial on July 16, 2012.

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