Judge Rejects Citigroup-SEC Mortgage Settlement

A federal judge blocked Citigroup Inc.’s proposed $285 million settlement over the sale of toxic mortgage debt, excoriating the top U.S. market regulator over how it reaches corporate fraud settlements.

U.S. District Judge Jed Rakoff in Manhattan said the U.S. Securities and Exchange Commission appeared uninterested in actually learning what Citigroup did wrong, and erred by asking him to ignore the interests of the public.

“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” Rakoff wrote in the opinion.

He said the proposed settlement was “neither reasonable, nor fair, nor adequate, nor in the public interest.”

Danielle Romero-Apsilos, a Citigroup spokeswoman, declined immediate comment, as did the SEC.

In its complaint, the SEC accused Citigroup of selling a $1 billion mortgage-linked collateralized debt obligation, Class V Funding III, in 2007 as the housing market was beginning to collapse, and then betting against the transaction.

One Citigroup employee, director Brian Stoker, was also charged by the SEC. He is contesting those charges.

Rakoff consolidated the two cases, and set a July 16, 2012, trial date.

No Admission of Wrongdoing

Rakoff called the Citigroup accord too lenient, noting that the bank was charged only with negligence, neither admitted nor denied wrongdoing, and could avoid reimbursing investors for more than $700 million of losses. Private investors cannot bring securities claims based on negligence.

“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,” the judge wrote.

The settlement would have required the third-largest U.S. bank to give up $160 million of alleged ill-gotten profit, plus $30 million of interest. It also would have imposed a $95 million fine for the bank’s alleged negligence, less than one-fifth what Goldman Sachs Group Inc. paid last year in a $550 million SEC settlement over a different CDO.

Rakoff called the $95 million fine “pocket change” for Citigroup, and said investors were being “short-changed.”

The case is SEC v Citigroup Global Markets Inc., U.S. District Court, Southern District of New York, No. 11-07387.