NEW YORK — A US judge Monday rejected a $285 million settlement Citigroup made with US regulators over its marketing of mortgage securities that quickly went sour, saying the bank was getting off lightly.
New York federal court judge Jed Rakoff scolded the Securities and Exchange Commission for agreeing to a deal that he called inadequate and not in the public interest.
He also labelled the huge bank a “recidivist” that viewed such fines as “pocket change” and simply “a cost of doing business.”
The deal announced October 19 addressed the bank’s having made lucrative short trading bets against a $1 billion collateralized debt obligation (CDO) — a package of home loans — which it sold investors in 2007.
Within months the CDO was downgraded and went into default, costing investors several hundred million dollars, while the bank took in $160 million from its short position, according to the SEC.
Accused of cheating investors, Citigroup finally agreed to pay $285 million in civil penalties and returned profits to settle the charges, without admitting or denying the accusations.
“Although this would appear to be tantamount to an allegation of knowing and fraudulent intent… the SEC, for reasons of its own, chose to charge Citigroup only with negligence,” Rakoff said in his rejection of the deal.
He said that the SEC did not give him enough information to know whether the terms were fair or correct, but noted that the sum Citigroup was to pay “leaves the defrauded investors substantially short-changed.”
Moreover, the SEC’s increasingly common settlements in which an offender is allowed to pay fines without conceding guilt did not meet the regulator’s own standard of “the public interest”, he added.
“The parties’ successful resolution of their competing interests cannot be automatically equated with the public interest, especially in the absence of a factual base on which to assess whether the resolution was fair, adequate, and reasonable,” he wrote in his decision.
“If the allegations of the complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business,” Rakoff said.
The SEC defended the deal, saying that the fines and other reform undertakings made by Citigroup in the settlement outweighed seeking an admission of guilt.
Blocking a settlement solely because of the offender refused to admit guilt “also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court,” SEC enforcement division chief Robert Khuzami said in a statement.
The SEC is reviewing the decision to see how it should proceed, he said.
He added that the SEC is not empowered to recover investor losses, but said the money Citigroup was to pay would have been turned over to harmed investors.