Will Judge Rakoff Bounce the Citigroup Settlement?

By Cydney Posner

For good or ill, depending on your point of view, Judge Rakoff is apparently at it again, according to this article in The Wall Street Journal, suggesting that he may not approve the SEC's recent $285M settlement with Citigroup. (You may recall that Judge Rakoff also rejected the SEC's settlement with BofA, and only reluctantly approved it after BofA sweetened the deal.) As you know, the Citigroup settlement arose out of the SEC's charge that Citigroup had misled investors about a $1 billion CDO tied to the U.S. housing market. Citigroup had allegedly structured the mortgage-related assets in the CDO portfolio and then taken a proprietary short position against the assets. The SEC alleged that Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select. Once the housing market began to show signs of distress, the CDO soon defaulted, leaving investors with losses while Citigroup made $160M on the deal. As part of the settlement, Citigroup did not admit or deny wrongdoing.

According to the article, the Judge asked a number of questions about the settlement, among them why the court should impose a judgment in a case in which the SEC alleges a serious securities fraud, but the defendant neither admits nor denies wrongdoing?

Although Judge Rakoff does not appear to require any additional motivation, perhaps his reaction was spurred on by the "Occupy" movement or by this DealBook column in The New York Times (courtesy of Propublica)? This piece wonders why, after "years of lengthy investigations into collateralized debt obligations, the mortgage securities at the heart of the financial crisis, the S.E.C. has brought civil actions against only two small-time bankers." However, the author does not take a hatchet to the SEC – quite the opposite: "compared with the Justice Department, the S.E.C. is the second coming of Eliot Ness. No major investment banker has been brought up on criminal charges stemming from the financial crisis.… Contrary to expectations, the embattled and oft-assailed agency has done almost everything right with structured finance investigations, taking aim at abuses related to C.D.O.'s and other complex deals. The S.E.C. has also devoted adequate resources to the issue. It put together a special task force on structured finance, sending the proper signal of the agency's priorities both internally and externally. The task force is staffed by bright people, an invigorating mix of young go-getters and experienced hands. Those people have understood for years what was wrong with the C.D.O. business on Wall Street." Instead the author contends that the SEC is simply risk averse, afraid to take on the big guns and willing only to bring the safest cases where email evidence clearly makes the SEC's case.