Citigroup-SEC Settlement Revoked
Yesterday, U.S. District Judge Jed Rakoff rejected Citigroup Inc.’s (NYSE:C - News) $285 million settlement with the U.S. Securities and Exchange Commission (Toronto:SEC.TO - News). The settlement was to compensate investors for misleading them with a housing market related collateralized debt obligation (TSXV:CDO.V - News).
Rakoff concluded that the facts and figures submitted by Citigroup were unsatisfactory. Moreover, he commented that the settlement was "neither fair, nor reasonable, nor adequate, nor in the public interest." Moreover, Rakoff has planned a trial on July 16, 2012, though Citi and the SEC might come up with a new settlement for the judge’s approval in advance.
According to the judge, absence of proper documents prevented him to give a green signal to the settlement. Moreover, he condemned regulators for depriving the general public from their right of knowing the details of Citi’s wrongdoing in the deal.
As per Rakoff, such protective shields provided to banks by regulators would encourage them in such acts. These unlawful activities by the banks have affected the total economy to a large extent. Any wrong step in support of the banks would conceal these facts from emerging in the interest of the public.
On the contrary, SEC was not convinced with the judge’s decision and demanded more judicial power to take decisions while increasing the agency's authority to levy a fine on the companies and individuals.
Background
In October, Citi agreed to settle the charges, which SEC filed in the U.S. District Court in New York, accusing Citi of misleading investors by misrepresenting facts in its mortgage-backed securities of over $1 billion. The SEC's complaint accuses the investment bank for creating a CDO, which was made up of mortgage-backed securities.
Citi was charged by the SEC in the U.S. for misstating facts and betting against a complex mortgage investment in 2007. According to the SEC, the statements did not disclose that Citi had played a significant role in selecting the assets and had taken a $500 million short position.
Moreover, the transaction closed in February 2007 and by November 2007, a rating agency downgraded every tranche and the CDO defaulted. Citi made $160 million in the deal comprising fees of approximately $34 million for structuring and marketing the transaction and additionally realized net profits of $126 million from its short position, though investors lost millions.
Competitors
Previously, in September 2009, Rakoff also had dismissed $33 million settlement between the SEC and Bank of America Corp. (NYSE:BAC - News). The deal was related to civil charges imposed on BofA. The bank was accused of misleading shareholders when it acquired Merrill Lynch at the peak of the financial crisis in 2008. BofA failed to disclose the payment of $5.8 billion in bonuses to employees even though it recorded $27.6 billion yearly loss.
Among Citi’s competitors, Goldman Sachs & Co. (NYSE:GS - News) agreed to pay $550 million to settle similar charges in 2010, followed by JPMorgan Chase & Co. (NYSE:JPM - News), who faced similar charges in June 2011 and paid $153.6 million. All these cases had intricate investments called collateralized debt obligations, backed largely by mortgages securities.
Citigroup currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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