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The odds that Citigroup's $285 million securities settlement with the Securities and Exchange Commission would avoid the courtroom of Judge Jed Rakoff were 97%. Citi's luck was not good.
November 4
NEW YORK — The Securities and Exchange Commission on Monday defended its proposed $285 million settlement of fraud charges against Citigroup Inc. over a mortgage-bond deal.
Last month, U.S. District Judge Jed S. Rakoff questioned why he should approve that pact, challenging the boilerplate language often used to resolve such cases. The judge asked the parties why he should approve the settlement of "a serious securities fraud" case where the defendant neither admits or deny wrongdoing.
The judge demanded that both sides appear for a hearing Wednesday on the settlement, which was reached Oct. 19.
In a court filing Monday, Matthew T. Martens, chief litigation counsel in the SEC's Enforcement Division, said the proposed settlement should be approved and is "fair, adequate and reasonable."
"The proposed consent judgment results in a payment of $285 million by Citigroup," Mr. Martens said. "This amount reasonably reflects the monetary relief likely to be available to the Commission if successful at a trial on the merits, also taking into account the litigation risks, the benefits of avoiding those risks and the wise allocation of agency resources to serve the interests of investors here as well as in other matters not before the court."
The SEC had alleged that the New York firm failed to disclose to investors its role in selecting underlying investments in a $1 billion mortgage-bond deal called Class V Funding III and that it retained a short position in those assets.
The judge also asked the SEC to justify why the proposed penalty to be paid by Citigroup is "less than one-fifth of the $535 million penalty assessed" in a settlement with Goldman Sachs Group Inc. last year over a complex financial instrument tied to subprime mortgages, named Abacus 2007-AC1. The proposed Citigroup settlement includes a $95 million penalty.
In its court filing Monday, the SEC said that the violations alleged against Goldman were "worthy of a more significant sanction" and the penalty reached with Citigroup reflects the SEC's consideration of the deterrent impact it may have on similar conduct in the future.
In court documents Monday, Citigroup said the deal should be approved, noting that the SEC alleged its employees were accused of negligence in failing to ensure that disclosures to sophisticated investors provided complete information regarding its role in the transaction, rather than intentionally misleading those investors.
"Most significantly, Citigroup did not predict or profit from the subprime crisis, the collapse of housing prices, or the collapse of the [collateralized debt obligation] market," said Brad S. Karp, one of the firm's lawyers, in a court filing. "Precisely to the contrary: over a period of 18 months beginning in late 2007, Citigroup's CDO-related losses totaled more than $30 billion--more than any other financial institution in the world."
In its filing, the SEC said the potential loss to investors on the deal could be in excess of $700 million. However, the net profits realized by Citigroup was at least $160 million, which was the basis for the proposed disgorgement in the pact, the SEC said.
Citigroup lawyers said the firm lost "tens of billions of dollars" in its CDO-related investments during this period "because it retained significant long positions in the CDOs it structured."
The SEC noted that the proposed judgment requires Citigroup implement a series of enhancements of its processes for the review and approval of mortgage-related securities offerings and related disclosures.
