A federal judge refused to approve the Securities and Exchange Commission's $75 million settlement with Citigroup over the bank's alleged failure to disclose nearly $40 billion in subprime securities.

U.S. District Judge Ellen Segal Huvelle said she didn't have "sufficient information" to sign off on the deal and asked both sides to file legal briefs to support the settlement.

Last month, the SEC sued Citigroup, alleging the bank understated its exposure to subprime assets in 2007 by nearly $40 billion. The SEC alleges the bank misled investors during conference calls, when it stated its subprime exposure was $13 billion, when it was really over $50 billion.

The SEC also sued Citigroup's then-chief financial officer Gary Crittenden and then-head of investor relations Arthur Tildesley Jr. Both men settled without admitting or denying wrongdoing. Mr. Crittenden agreed to pay $100,000 and Mr. Tildesley $80,000.

Judge Huvelle spent the bulk of the 90-minute hearing questioning why the SEC singled out those two men when its complaint mentioned other senior officers at the bank. She also questioned how the regulators arrived at the penalty size for both the individuals and company. The SEC's case against the individuals was filed in administrative court and falls outside the jurisdiction of the federal judge.

"I look at this and say, 'Why would I find this fair and reasonable?' " the judge told both sides. "You expect the court to rubber-stamp, but we can't," she said.

The judge drew several comparisons to the SEC's lawsuit filed against Bank of America Corp. (BAC) for failing to disclose bonuses paid to Merrill Lynch executives during the period when Bank of America was preparing to acquire Merrill. Last year, federal Judge Jed Rakoff rejected the SEC's $33 million settlement, finding it wasn't fair. The matter was eventually settled on the eve of trial when the bank agreed to pay a $150 million fine and take remedial actions.

Judge Huvelle also questioned why current Citigroup shareholders should pay those harmed by the loss. She said there was no "guidepost" to determine whether $75 million was a fair penalty.

She also questioned the SEC about its decision to charge Messrs. Crittenden and Tildesley but no other executive who she suggested would have known about the bank's exposure. "You've focused on two individuals and I can't for the life of me figure out why," the judge told the SEC lawyers.

SEC lawyer Erica Williams said the SEC's economists analyzed the gain to Citigroup during a three-month period in the complaint, when the bank allegedly didn't disclose enough about its exposure. To put the $75 million proposed settlement in context, she noted the high end of that benefit analysis was $123 million.

Ms. Williams also said Mr. Crittenden spoke on the investor calls while Mr. Tildesley drafted and approved the disclosure statements, making them negligent for the misstatement, in the SEC's view.

Brad Karp, a lawyer representing Citigroup, told the judge the entire "mess" of subprime losses across Wall Street "is being looked at today with a profound hindsight bias." He said there was a breakdown in communication between Citigroup's banking side and disclosure official. Mr. Crittenden was provided with information from business units that, if analyzed, would have allowed him to detect some "cracks" in the mortgages, but "he didn't pick up on that," said Mr. Karp.

The judge said that sounded "rather thin" and later suggested the two men "could only be culpable if they knew" the size of the exposure.

She added, "You can't prosecute a company on the basis of a [internal] miscommunication."

Ms. Williams of the SEC responded, "That process breakdown is negligence."

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