NEW YORK — A judge on Monday used unusually harsh language to strike down a $285 million settlement between Citigroup and the Securities and Exchange Commission over toxic mortgage securities, saying he couldn’t tell whether the deal was fair and criticizing regulators for shielding the public from details of the firm’s wrongdoing.
U.S. District Judge Jed Rakoff said the public has a right to know what happens in cases that touch on “the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives.”
Rakoff said he had spent hours trying to assess the settlement but concluded he had not been given “any proven or admitted facts upon which to exercise even a modest degree of independent judgment.”
He called the settlement “neither fair, nor reasonable, nor adequate, nor in the public interest.”
The SEC shot back in a statement from Enforcement Director Robert Khuzami, saying the deal was all four of those things and “reasonably reflects the scope of relief that would be obtained after a successful trial.”
The SEC had accused the bank of betting against a complex mortgage investment in 2007 – making $160 million in the process – while investors lost millions. The settlement would have imposed penalties on Citigroup but allowed it to deny allegations that it misled investors.
Citigroup said it disagreed with Rakoff, calling the proposed settlement “a fair and reasonable resolution to the SEC’s allegation of negligence” and consistent with long-established legal standards.
“In the event the case is tried, we would present substantial factual and legal defenses to the charges,” it added.
The SEC’s consent judgment settling the case was filed the same day as its lawsuit against Citigroup, the judge noted.
“It is harder to discern from the limited information before the court what the SEC is getting from this settlement other than a quick headline,” the judge wrote.
“In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers,” Rakoff said. “Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”
He set a July 16 trial date for the case.
Khuzami said in the SEC statement that Rakoff made too much out of the fact that Citigroup did not have to admit wrongdoing.