Judge Reluctantly Approves SEC’s|$285 Million Deal With Citigroup

MANHATTAN (CN) - A deal between Citigroup and regulators allowing the bank to settle $600 million in mortgage fraud claims for a fraction of that amount must move forward, despite U.S. District Judge Jed Rakoff's lament that an appellate court's insistence he approve the plan has left him with "nothing but sour grapes."

Three years ago, federal regulators accused Citigroup of selling $1 billion in mortgage-backed CDOs that one of its traders allegedly called a "collection of dogsh!t," while secretly shorting the securities.

Citigroup swiftly agreed to settle for $285 million, with $95 million going to the victims, and was allowed to neither confirm nor deny the allegations.

At a hearing to approve that deal, Judge Rakoff roasted the SEC's lawyers for giving the megabank what he called a "proverbial slap on the wrist" that would amount to nothing more than "window dressing."

Weeks after that hearing, Rakoff blocked what he called a "dangerous" settlement that would be "neither fair, nor reasonable, nor adequate, nor in the public interest."

The 2nd Circuit stayed a trial against Citigroup until it finally reversed Rakoff's decision in June.

A federal judge has no power to determine whether a settlement is "adequate," the appeals court found.

"The job of determining whether the proposed SEC consent decree best serves the public interest, however, rests squarely with the SEC, and its decision merits significant deference," its ruling stated.

The ruling only gave judges power to intervene in cases where a settlement is unclear, illegal or "tainted by improper collusion or corruption."

Left with no other choice, Rakoff gave the settlement the green light on Tuesday.

"They who must be obeyed have spoken, and this court's duty is to faithfully fulfill their mandate," he wrote in a three-page opinion.

But first, Rakoff fired some parting shots at the appellate judges and the parties that pushed for this outcome.

While the appeals court argued the SEC would be "politically liable if it fails to adequately perform its duties," Rakoff countered that the agency, "by its charter, is designed to be free from political interference."

The agency's current chair, Mary Jo White, gave a speech on Oct. 3, 2013 titled "The Importance of Independence," Rakoff noted.

He approved the settlement for reaching the appellate court's "modest standard."

"Nonetheless, this court fears that, as a result of the Court of Appeal's decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary's contempt powers will in practice be subject to no meaningful oversight whatsoever," he wrote. "But it would be a dereliction of duty for this court to seek to evade the dictates of the Court of Appeals. That court has now fixed the menu, leaving this court with nothing but sour grapes."

The SEC's enforcement director Andrew Ceresney defended the settlement in a statement.

"We are pleased with the approval of the settlement that holds Citigroup accountable, deprives the firm of its ill-gotten gains, and provides $285 million for harmed investors," he said.

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