A federal judge rejected a $285 million dollar settlement between Citigroup and the Securites and Exchange Commission Monday after determining that the American financial watchdog had to prove – rather than just claim - the bank committed fraud.
Federal Judge Jed S. Rakoff from the United States District Court in Manhattan struck down the settlement in opposition to allowing the major bank to settle a case of financial negligence outside of a trial without admitting guilt, a long-standing practice on Wall Street. According to the Globe and Mail, the judge said the SEC “appeared uninterested in actually learning what Citigroup did wrong, and erred by asking him to ignore the interests of the public.”
The SEC charged Citigroup with betting against a $1 billion dollar mortgage fund the bank sold to investors prior to the financial crisis in 2007. According to the New York Times, the fraud occurred when “Citigroup falsely [told] investors that an independent party was choosing the portfolio’s investments.” When the fund failed after the collapse of the sub-prime mortgage market, investors lost millions and the bank “reaped fees and trading profits of ‘at least $160 million’ according to an SEC court finding.
Judge Rakoff’s decision was “a stern challenge to the government’s recent history of imposing ‘relatively modest’ punishments on big Wall Street banks for wrongdoing during the financial crisis” according to the Los Angeles Times. He added 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 SEC was not pleased with the judge’s decision. In a press release issued to Bloomberg, Robert Khuzami, the Director of the SEC’s Division of Enforcement, stated that “while we respect the court’s ruling, we believe that the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial.”
Khuzami also addressed the judge’s claim that an admission of guilt for Citigroup to be held accountable for their actions:
“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. It also ignores decades of established practice throughout federal agencies and decisions of federal courts.”
According to Reuters, Citigroup spokeswoman Danielle Romero-Apsilos said the rejected settlement was a “fair and reasonable resolution to the SEC’s allegation of negligence”. She added that the bank would present “substantial factual and legal defenses” in the event of a trial.
Judge Rakoff is becoming increasingly known for taking aggressive stands against the SEC’s lacklustre approach to holding banks responsible in cases of financial mis-management. The federal agency has had an increased mandate to watch banking institutions more closely following the 2007 financial collapse.