Judge Jed S. Rakoff on Monday rejected a settlement negotiated between the SEC and Citigroup over a $1 billion mortgage fund and said that he could not determine whether the $285 million settlement was “fair, reasonable, adequate and in the public interest,” as legally required, since the agency claimed but did not prove fraud on the part of Citigroup.
In his 15-page ruling, he also called Citigroup a repeat offender, and said that current SEC policy of not requiring an admission of wrongdoing creates a substantial potential for abuse.
The New York Times reported that Rakoff, a judge in U.S. District Court in Manhattan, in throwing out the settlement, was highly critical of the agency’s habit of allowing companies to settle without having to admit wrongdoing. He has already been critical of the SEC’s handling of the case and also imposed a record penalty in the Rajaratnam-Galleon case while again upbraiding the SEC for its treatment of insider trading cases, as previously reported by AdvisorOne.
Robert Khuzami (left), director of the SEC’s Division of Enforcement, said in a statement after the ruling that while the SEC “respects the court’s ruling, we believe that the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial.”
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Khuzami went on to say that the court’s criticism that the “settlement does not require an ‘admission’ to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial. It also ignores decades of established practice throughout federal agencies and decisions of the federal courts.”
The usual practice of the SEC has been to work out a settlement with the accused wrongdoers without them having to admit wrongdoing. The agency previously has done so numerous times, including in cases against Bank of America, JPMorgan Chase and UBS, among others. It says that since it lacks the money or staff to square off against big firms in court, it must do so. Big companies, it said, do not want to concede wrongdoing since it will open the door to liability and lawsuits. However, such cases must be approved by a federal judge.