FEDERAL judge angrily blocked Citigroup’s proposed $285m (£184m) settlement over the sale of toxic mortgage debt, rebuking the top US market regulator over how it reaches corporate fraud settlements.
District Judge Jed Rakoff said the US Securities and Exchange Commission appeared uninterested in actually learning what Citigroup did wrong, and erred by asking him to ignore the interests of the public.
“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” Rakoff wrote in his ruling yesterday.
The judge added that it was difficult to discern “from the limited information before the court what the SEC is getting from this settlement other than a quick headline.”
He said that the proposed settlement was “neither reasonable, nor fair, nor adequate, nor in the public interest.”
In response, the SEC’s director of enforcement, Robert Khuzami, said in a statement that $285m “reasonably reflects the scope of relief that would be obtained after a successful trial” but without the “risks, delay and resources required at trial.”
Citigroup declined to comment.
In its complaint, the SEC accused Citigroup of selling a $1bn mortgage-linked collateralised debt obligation, in 2007 as the housing market was beginning to collapse, and then betting against the transaction.
Rakoff called the Citigroup accord too lenient, noting that the bank was charged only with negligence, neither admitted nor denied wrongdoing, and could avoid reimbursing investors for more than $700m of losses.
The settlement would have required the US bank to give up $160m of alleged ill-gotten profit, plus $30m of interest. It also would have imposed a $95m fine, which Rakoff called “pocket change” for Citigroup and said investors were being “short-changed.”