Citigroup Toxic Mortgages: $285M SEC Deal Rejected by Angry Judge

Filed in Gather News Channel by on November 29, 2011 0 Comments

Citigroup packaged and sold toxic mortgages. The SEC pursued a suit that resulted in a “no admission of wrongdoing” $285 million settlement. However, an angry Judge Jed Rakoff refused to approve the deal, excoriating Citigroup and the SEC in his order.

In his written opinion, US District Court Judge Jed Rakoff completely rejected the SEC-brokered deal, saying that the case needed to go to trial to better insure exposure of the facts. His language was unusually harsh, as he criticized not only Citigroup for the actions that led to the suit but the SEC, too, for agreeing to a deal that did not appear to reflect the enormity of the damage done.

Citigroup.svg

The judge, having been an SEC attorney earlier in his career, indicated that the toxic
mortgages securities settlement did not give enough information for him to tell whether he should approve it or not:

…the public has a right to know what happens in cases that touch on “the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives.” …the SEC has a responsibility to ensure that the truth emerges.

He had spent hours trying to assess the settlement but concluded that he had not been given “any proven or admitted facts upon which to exercise even a modest degree of independent judgment,” and he called the settlement “…neither fair, nor
reasonable, nor adequate, nor in the public interest.”

The SEC sniped back that the agreement had all those things. However, it was not arguable that investors lost $700 million while Citigroup made $190 million selling the toxic mortgages securities to them, while the settlement provided for only the loss of their profit and $95 million in punitive damages. Citigroup, AIG, and others will take that deal all day long.

All of that aside, what seemed to aggravate Judge Rakoff the most was that Citigroup, having done that, was not required to admit any wrongdoing, and could, in fact, specifically note that in any announcement of the settlement. These statements always say, “While admitting no wrongdoing, Corporation X has agreed to this settlement in the best interest of its shareholders and to put this matter behind us.”

Ordinary citizens, when they enter a plea deal, must stand before the Court and describe their crimes. The judge made it clear in his call for the trial to “…ensure the truth emerges,” that public assignment of wrongdoing in the sale of toxic mortgages securities was an important, even crucial, part of the process.

SEC Chairman Mary Schapiro sent a letter Monday to Sen. Jack Reed, D-R.I., who heads the Senate Banking subcommittee on securities Monday, asking for Congress to expand the agency’s authority to fine companies and individuals. Such changes would “further enhance the effectiveness of the (SEC’s) enforcement program,” Shapiro said. A good start, however late.

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