A U.S. federal judge on Monday struck down a $285 million US settlement that Citigroup reached with the Securities and Exchange Commission, saying he couldn't tell whether the deal was fair and criticizing regulators for shielding the public from the details of what the firm did wrong.
U.S. District Judge Jed Rakoff said the public has a right to know what happens in cases that touch on "the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives."
In such cases, the SEC has a responsibility to ensure that the truth emerges, he wrote. Rakoff said he had spent hours trying to assess the settlement but concluded that he had not been given "any proven or admitted facts upon which to exercise even a modest degree of independent judgment."
He called the settlement "neither fair, nor reasonable, nor adequate, nor in the public interest."
The SEC had accused the bank of betting against a complex mortgage investment in 2007 — making $160 million US in the process — while investors lost millions.
The settlement would have imposed penalties on Citigroup even as it allowed the company to deny allegations that it misled investors. The SEC allowed the consent judgment settling the case to be filed the same day it filed its lawsuit against Citigroup, the judge noted.
"It is harder to discern from the limited information before the court what the SEC is getting from this settlement other than a quick headline," the judge wrote.
"In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers," Rakoff said.
"Even in our nation, apologists for suppressing or obscuring the truth may always be found.
SEC has duty to see 'that the truth emerges'
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."
He set a July 16 trial date for the case.
Citi said it was reviewing the decision and declined to comment. The SEC did not immediately respond to a request for comment.
In the civil lawsuit filed last month, the SEC said Citigroup Inc. traders discussed the possibility of buying financial instruments to essentially bet on the failure of the mortgage assets. Rating agencies downgraded most of the investments just as many troubled homeowners stopped paying their mortgages in late 2007.
That pushed the investment into default and cost its buyers' —hedge funds and investment managers — several hundred million dollars in losses.
Earlier this month, Rakoff staged a hearing in which he asked lawyers on both sides to defend the settlement. At the hearing, Rakoff questioned whether freeing Citigroup of any admission of liability could undermine private claims by investors who stand to recover only $95 million in penalties on total losses of $700 million.
Rakoff has criticized past settlements
This wasn't the first time that the judge struck down an SEC settlement with a bank, and he has made no secret of his disdain for settlements between the government agency and banks for paltry sums and no admission of guilt.
"The SEC's longstanding policy — hallowed by history, but not by reason — of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact," he wrote in Monday's decision.
In 2009, Rakoff rejected a $33 million settlement between the SEC and Bank of America Corp. calling it a breach of "justice and morality."
The deal was over civil charges accusing the bank of misleading shareholders when it acquired Merrill Lynch during the height of the financial crisis in 2008 by failing to disclose it was paying up to $5.8 billion in bonuses to employees even as it recorded a $27.6 billion yearly loss.
In February 2010, he approved an amended settlement for over four times the original amount, but was caustic in his comments about the $150 million pact, calling it "half-baked justice at best."
He said the court approved it "while shaking its head."
Citigroup's $285 million would represent the largest amount to be paid by a Wall Street firm accused of misleading investors since Goldman Sachs & Co. agreed to pay $550 million to settle similar charges last year.
JPMorgan Chase & Co. resolved similar charges in June and paid $153.6 million.
All the cases have involved complex investments called collateralized debt obligations. Those are securities that are backed by pools of other assets, such as mortgages.
Rakoff's ruling Monday was the latest in a series of setbacks for the SEC under the leadership of Chairman Mary Schapiro.
Rakoff has said he doesn't believe the agency has been sufficiently tough in its enforcement deals with Wall Street banks over their conduct prior to the financial crisis.
The SEC told Rakoff recently that $285 million was a fair penalty, which will go to investors harmed by Citigroup's conduct, and that it was close to what the agency would have won in a trial.