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Citigroup Judge Warns of No Oversight While Approving SEC Accord

AUG 5, 2014 2:12pm ET
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Citigroup Inc.'s $285 million mortgage-securities pact with the Securities and Exchange Commission was approved by a judge whose earlier rejection of the accord was assailed by a federal appeals court.

"They who must be obeyed have spoken, and this court's duty is to faithfully fulfill their mandate," U.S. District Judge Jed Rakoff in New York said of the appeals court in a three-page opinion today.

Still, Rakoff voiced his fear that the appeals court's ruling means regulators' future legal settlements "will in practice be subject to no meaningful oversight whatsoever."

Rakoff's decision resolves SEC claims the bank misled investors in a $1 billion financial product linked to risky mortgages, costing investors more than $600 million. In June, the federal appeals court in Manhattan called Rakoff's 2011 rejection of the deal an "abuse of discretion" and returned the settlement to him for reconsideration.

"That court has now fixed the menu, leaving this court with nothing but sour grapes," Rakoff wrote.

The settlement stems from SEC allegations that Citigroup structured and sold collateralized debt obligations in 2007 without telling investors that it helped pick about half the underlying assets, and that it was betting they would decline in value by taking a short position.

In 2011, Rakoff, in a rebuke of the agency, criticized its practice of agreeing to accords that don't require defendants to admit wrongdoing. He said the parties didn't give him "any proven or admitted facts" he could use to determine whether the settlement was fair.

In its June ruling—a win for the bank and the regulator—the appeals court cited the SEC's purview to tailor settlements as it sees fit, saying Rakoff erred by requiring it first establish the "truth" of the allegations against the bank.

While the appellate court said there were probably enough facts to allow approval of the Citigroup accord, it sent the case back to Rakoff to review and said he may request additional information from the parties.

Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, declined to comment on Rakoff's latest decision.

Provisions allowing defendants to neither admit nor deny SEC allegations have been a sticking point for Rakoff on more than one occasion. The regulator has defended the practice, saying it encourages settlements and allows defendants to avoid public admissions that could be used in private litigation.

In a 2012 policy change, the SEC limited the "neither admit nor deny" language to deals with defendants who have not already been convicted in related criminal cases.

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