Bloomberg News

Citigroup, SEC Defend $285 Million CDO Accord to U.S. Judge

November 15, 2011

(Updates with comment from judge in third paragraph.)

Nov. 9 (Bloomberg) -- Citigroup Inc. and federal regulators defended their $285 million settlement of claims that the bank misled investors in collateralized debt obligations before a judge who questioned whether the agreement is in the public interest.

U.S. District Judge Jed Rakoff, who in 2009 rejected a $33 million settlement between the U.S. Securities and Exchange Commission and Bank of America Corp., spent much of an hour-long hearing today asking both sides why he should approve an accord that doesn’t require Citigroup to admit any wrongdoing.

“Why does that make any sense in this context?” Rakoff asked Matthew Martens, the SEC’s chief litigation counsel, in the hearing in Manhattan federal court today.

Rakoff asked New York-based Citigroup and the SEC last month to address nine questions about the proposed settlement, including whether the public interest requires a determination of the truth of Citigroup’s alleged fraud. In today’s hearing, Rakoff was critical of the SEC’s arguments that he isn’t required to consider the public interest in considering the settlement.

“It’s an interesting position,” Rakoff told Martens. “I’m supposed to exercise my power, but not my judgment.”

Rakoff didn’t say when he’ll rule on the joint request to approve the settlement.

Order Barring Violations

Rakoff also asked why he should endorse a provision barring Citigroup from violating securities laws in the future, when the SEC hasn’t filed civil contempt proceedings against a major financial institution, including Citigroup, for violating such a provision in at least the last 10 years.

“Why do you ask for an injunction when you never use it?” Rakoff asked Martens.

Martens said the agency in 1972 adopted a policy barring defendants from settling cases and later denying the agency’s allegations publicly. Under the policy, defendants may say they neither admit nor deny the SEC’s allegations.

Rakoff asked Brad Karp, a lawyer for Citigroup, if the bank admits it did what the SEC claims in the complaint.

“We do not admit the allegations,” Karp said, to laughter in the standing-room-only courtroom. “But if it’s any consolation, we don’t deny them.”

Public Interest

Rakoff asked Martens whether the public interest isn’t better served by trying the agency’s claims in court to determine whether they are true.

Martens said the SEC complaint in the case included detailed allegations of Citigroup’s conduct in promoting the CDOs. He said Citigroup’s violation of federal securities laws, in the face of earlier agreements requiring compliance with the law, was a factor the SEC used to determine the amount of the latest settlements.

“I don’t believe their failure to admit the allegations leaves the public wondering what occurred here,” Martens told Rakoff.

Martens also told Rakoff that the settlement serves the public interest and that it permits the SEC to use its limited resources to pursue other securities violators.

In response to another of Rakoff’s questions, Martens said the SEC estimates that Citigroup gained from $160 million to $190 million from the CDOs at issue in the case. Investors lost more than $700 million, he said.

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).

--Editors: Peter Blumberg, Fred Strasser

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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