A federal judge rejected the Securities and Exchange Commission's effort to strike a settlement with Citigroup over financial crisis-era wrongdoing, telling the regulatory agency that it must be willing to take stronger action against banks.
In an order issued Monday morning, Jed Rakoff, a federal judge in Manhattan, said the settlement the SEC had proposed was a "very good deal for Citigroup" but did not serve the public interest.
The SEC accused Citi in October of selling investors mortgage-backed securities that it designed and then bet against. At the same time that it filed its complaint, though, the SEC said it had agreed to settle with Citi in exchange for a $285-million fine. In making the settlement, the bank said it was neither admitting nor denying the accusations.
The accusations against Citi are similar to those made against Goldman Sachs and JPMorgan Chase & Co. in previous cases filed since the financial crisis. In those cases, other federal judges have approved SEC settlements, in the Goldman case for $550 million and in the JPMorgan case for $153 million.
The SEC has frequently dealt with wrongdoing in the financial industry through negotiated settlements in which the firms do not have to admit to the accusations. In his order today, Rakoff said that those settlements have not proven successful at preventing the banks from further wrongdoing.
A spokeswoman for Citi said the bank had no comment. The SEC's director of enforcement, Robert Khuzami, said in a statement that Rakoff's order "ignores decades of established practice throughout federal agencies and decisions of the federal courts."
"Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court," Khuzami said.
Rakoff has questioned previous settlements between the SEC and big banks on similar grounds. Most famously, Rakoff criticized the SEC's willingness to settle with Bank of America, after the bank was accused of misleading investors about its purchase of Merrill Lynch. In that case, though, Rakoff eventually signed off on the settlement.
Rakoff is showing an unwillingness to make a similar concession in the Citi case and has told both sides to be ready to go to court in July of next year. In a stinging conclusion to his order Monday, Rakoff wrote:
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. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. 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.
SEC targets Goldman Sachs with fraud suit
Judge Jed Rakoff taps into nation's outrage
SEC: Citi designed bad security for investors, bet against it
-- Nathaniel Popper
Photo: Judge Jed Rakoff in 2010. Credit: Los Angeles Times