Fed court to probe Citi settlement with SEC
The U.S. District Court for the Southern District of New York will hold a hearing Nov. 9 to review the recent settlement between Citigroup (C) and the Securities Exchange Commission. In October, the banking giant agreed to return $285 million to investors of a $1 billion collateralized debt obligation tied to the housing market. The settlement included a $95 million penalty assessed to Citi. U.S. District Court Judge Jed Rakoff filed his order Thursday, setting the review date. "The court is required to ascertain whether the proposed judgment is fair, reasonable, adequate, and in the public interest," Rakoff said. The SEC alleged Citigroup Global Markets, the broker-dealer subsidiary, handpicked the mortgages placed in the CDO, known as Class V Funding II, and potentially knew the quality of the underlying collateral. According to the SEC, one of the CDO traders described the Class V III portfolio in an internal message as "dogsh!t” and "possibly the best short EVER!" As part of the settlement, Citi neither admitted nor denied wrongdoing. "Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?" Rakoff asked in the filing Thursday. He said the court would consider whether there is an overriding public interest to determine if the SEC charges are true. The SEC said the investor losses were at least $160 million in the allegedly faulty deal, but Rakoff seeks to determine what the losses were at most. Rakoff also raised questions about how the proposed settlement was determined. The $95 million penalty, he said, is less than one-fifth of the $535 million penalty assessed to Goldman Sachs (GS) in a similar case. The penalty will be paid by Citigroup and its shareholders, and the court wants to know why the actual employees for the transaction will not pay more of the fine. As part of the review, the court will try to determine what "remedial undertakings" Citi will put in place and how they will ensure the alleged scheme won't occur again. Finally, Rakoff said both the SEC and Citi will be required to answer a question that continues to haunt both investors and Main Street since the financial crisis hit more than three years ago. "How can a securities fraud of this nature and magnitude be the result simply of negligence?" Write to Jon Prior. Follow him on Twitter @JonAPrior.