Court Rejects Citi Settlement with S.E.C.
The U.S. district court for the Southern District of New York last week rejected a $285 million proposed settlement between the Securities & Exchange Commission and Citigroup Global Markets. The case involves a $1 billion mortgage debt deal that Citigroup sold in early 2007. The S.E.C. alleged that Citigroup’s marketing materials materially mislead investors by failing to disclose that Citigroup “exercised significant influence” over the selection of assets and retained short positions in the assets it helped to select.
In the proposed deal, the parties agreed to a consent judgment with no admissions of fact or liability, and included Citigroup’s payment of $285 million dollars to the S.E.C. The payment consisted of the return of the $160 million Citigroup profited from the 2007 deal, $30 million of interest, and a $95 million civil penalty. As part of the settlement, Citigroup also consented to injunctive relief enforced by the Court for the next three (3) years.
The Court refused to approve the settlement, asserting that the proposed deal was not reasonable, fair, adequate, or in the public interest. The Court wrote that in the absence of any proven or admitted facts, it was without a framework to determine its adequacy, and the proposed consent judgment would not serve the “overriding public interest in knowing the truth.” The Court asserted that the S.E.C. has a duty to ensure that the truth emerges, and the Court would not approve a settlement where it felt the S.E.C. has not fulfilled this duty.
The Court asserted that the $95 million civil penalty was not a material amount to Citigroup, and that the consent judgment would not commit the S.E.C. to return any of the funds to the defrauded investors. The Court wrote that the parties’ resolution of their competing interests does not equal the public interest, “especially in the absence of a factual base on which to assess whether the resolution was fair, adequate, and reasonable.” Likewise, the Court took issue with the fact that the injunctive relief provisions asked the Court to “employ its power and assert its authority when it does not know the facts,” a practice he described as, “worse than mindless, it is inherently dangerous.” In rejecting the settlement, the Court consolidated the matter with a related case, and set both for trial in July 2012.
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