A federal judge in New York has struck down a $285 million settlement that Citigroup reached with the Securities and Exchange Commission, citing a need for truth about the financial markets.
U.S. District Judge Jed Rakoff said in a written ruling that "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."
The deal would have imposed penalties on Citigroup even as it allowed the company to deny allegations that it misled investors on a complex mortgage investment. The SEC accused the bank of betting against the investment in 2007 and making $160 million, while investors lost millions.
The SEC allowed a consent judgment settling the case to be filed the same day it filed its lawsuit against Citigroup, the judge noted.
"It is harder to discern from the limited information before the court what the SEC is getting from this settlement other than a quick headline," the judge wrote.
"In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers," Rakoff said. "Even in our nation, apologists for suppressing or obscuring the truth may always be found. But 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."
The SEC defended the settlement, describing it as "fair, adequate, reasonable, in the public interest."
SEC Enforcement Director Robert Khuzami said in a statement that Judge Rakoff made too much out of the fact that Citigroup was not required to admit any wrongful conduct in the deal.
Khuzami says forcing Citigroup to give up its profits and the imposition of financial penalties and mandatory business reforms outweigh the absence of an admission.
He says the amount the SEC secured from Citigroup in the deal is about what it could get after a successful trial.
A citi spokesperson said the company respectfully disagreed with the ruling. "We believe the proposed settlement is a fair and reasonable resolution to the SEC's allegation of negligence, which relates to a five-year-old transaction," the spokesperson said through a statement. "We also believe the settlement fully complies with long-established legal standards. In the event the case is tried, we would present substantial factual and legal defenses to the charges."
Rakoff set a July 16 trial date for the case.
This wasn't the first time that the judge struck down an SEC settlement with a bank, and he has made no secret of his disdain for settlements between the government agency and banks for paltry sums and no admission of guilt.
"The SEC's longstanding 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," he wrote in Monday's decision.
In 2009, Rakoff rejected a $33 million settlement between the SEC and Bank of America Corp. calling it a breach of "justice and morality."
"Once again, he's told the SEC that you cannot bring a weak settlement before a federal judge and ask him to rubber-stamp it without understanding what actually happened," said John Coffee. who directs Columbia Law School's Center on Corporate Governance.
With Brian Zumhagen