Earlier this week, Judge Jed S. Rakoff put his judicial foot down on the proposed settlement that had been reached between the SEC and Citigroup. The settlement would have resolved the SEC's allegations that the firm had mishandled the marketing of collateralized debt obligations (CDO's) that Citigroup sold.
In Judge Rakoff's words, the firm "dump[ed] some dubious assets on misinformed investors" and the settlement was reached before sufficient facts had been brought to light about the funds set up for the CDO's. He said that without "cold, hard, solid facts" to satisfy the public's interest, he could not approve the settlement.
The consent judgment would have resolved the matter. The SEC's agreement with the firm was to require it to return profits, interest and penalties in the amounts of $160 million, $30 million and $95 million, respectively. The firm was also putting into place various measures that would require a more stringent review and accountability for investment worthiness and related public statements.
In his opinion, the Judge stated that the enjoining of future violations was not sufficient and that the United States Supreme Court has held the public interest must be considered in the issuance of permanent injunctive relief. He concluded that the "proposed consent judgment is neither fair, nor reasonable, nor adequate, nor in the public interest."
Both the SEC and Citigroup issued statements about the opinion, with which Citigroup said it "respectfully" disagrees. The SEC's said its focus was not so much on the need for an admission of wrongdoing, which the Judge found lacking, but rather in the the disgorgement, penalties and reforms that would be forthcoming and avoid both the risk and expense of trial.
Citigroup said it had begun making the reforms that were agreed to and that the court's decision was not aligned with similar precedent. Other federal courts had approved similar settlements in major CDO cases. If the case were to go to trial, Citigroup's spokesperson noted that they will present substantial legal and factual defenses.
The Securities Lawyer Blog will keep you posted on the next developments in this matter.
The lawyers of Gusrae Kaplan Nusbaum, PLLC advise broker-dealers and firms in all aspects of securities regulation and compliance, as well as representation before all tribunals and agencies. Please contact our law offices for more information on representation and our securities litigation practice.
