Bloomberg News

Citigroup’s $285 Million SEC Settlement Questioned by Judge

October 27, 2011

(Updates with Citigroup spokeswoman in fifth paragraph.)

Oct. 27 (Bloomberg) -- Citigroup Inc.’s $285 million settlement with the U.S. Securities and Exchange Commission was questioned by a federal judge who asked both sides to justify the accord as fair.

U.S. District Judge Jed Rakoff, who in 2009 rejected a $33 million settlement between the SEC and Bank of America Corp., set a hearing on the matter for Nov. 9.

Citigroup, the third-biggest U.S. bank, agreed this month to pay the money to resolve SEC claim that the New York-based company misled investors in a $1 billion collateralized debt obligation linked to risky mortgages.

“Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” Rakoff wrote in the first of nine questions he ordered the parties to address in the hearing.

Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment on Rakoff’s order.

In September 2009, Rakoff rejected Bank of America’s settlement with the SEC over claims it misled investors about Merrill Lynch & Co. bonuses, saying the deal suggested “a rather cynical relationship between the parties.”

“The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger,” Rakoff wrote at the time. “The bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense not only of the shareholders, but also of the truth.”

New Terms

Rakoff in February 2010 approved a revised settlement, in which Bank of America agreed to pay $150 million to resolve broader allegations about misstatements to investors, including those on the Merrill Lynch bonuses.

In his five-page order today, Rakoff told the parties to address whether the public has an interest in determining if the SEC claims against Citigroup are true and how the amount of loss to victims and the proposed judgment against the bank were calculated.

Rakoff questioned the SEC’s plan for preventing future violations and asked why Citigroup shareholders -- not the individual executives responsible for the alleged fraud -- are required to pay.

“How can a securities fraud of this nature and magnitude be the result simply of negligence?” Rakoff wrote.

In the Citigroup settlement, announced Oct. 19, both sides agreed to resolve claims that Citigroup structured and sold the collateralized debt obligations in 2007 without telling investors it was betting the underlying assets, about half of which it had helped select, would decline in value.

The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-7387, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Josh Gallu in Washington. Editors: Stephen Farr, Charles Carter

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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