* Judge Jed Rakoff raises nine questions for SEC, bank
* $285 mln settlement tied to toxic housing-related CDO
* Rakoff has criticized SEC, rejected BofA accord
* Nov. 9 court hearing for bank and regulator
By Grant McCool and Jonathan Stempel
NEW YORK, Oct 27 A federal judge expressed deep
skepticism about a proposed $285 million civil settlement
between the top U.S. market regulator and Citigroup Inc
over charges that the bank defrauded investors.
A written order by U.S. District Judge Jed Rakoff was the
latest to put U.S. Securities and Exchange Commission
settlements with major banks under scrutiny.
Two years ago, Rakoff himself rejected an SEC accord with
Bank of America Corp , later approving revisions only
grudgingly, and Thursday's order suggests another showdown with
the regulator may be in the offing.
Rakoff directed the SEC and Citigroup to answer nine
questions about the settlement. These go to fundamental issues
such as the size of the fine imposed, why no individuals were
held financially responsible, and why the SEC did not demand
any admission of wrongdoing for a "serious securities fraud."
Citigroup spokeswoman Danielle Romero-Apsilos declined to
comment, but SEC spokesman John Nester said the agency was
looking forward to responding to the questions raised by the
Rakoff scheduled a Nov. 9 hearing in Manhattan federal
court on the fairness of the Oct. 19 settlement, which was
intended to resolve allegations that Citigroup defrauded
investors who bought toxic housing-related debt that the bank
bet would fail.
The SEC and criminal prosecutors are under pressure from
lawmakers and the public to bring cases that hold Wall Street
executives accountable for their role in the 2007-2009
financial crisis that triggered a deep global recession.
Robert Hillman, a professor at the University of California
at Davis School of Law, said that judges in the past would have
"rubber-stamped" settlements such as Citigroup's, but times
"Rakoff is asking the hard questions that everyone wants
asked," Hillman said. "He may run both sides through the
ringer, as he did with Bank of America.
"We want to have light shined on the fairness of these
settlements, and the judge is shining the flashlight," he
According to the SEC, the bank's Citigroup Global Markets
unit misled investors about a $1 billion collateralized debt
obligation (CDO) by failing to reveal it had "significant
influence" over the selection of $500 million of underlying
assets, and took a short position against those assets.
Among other matters, Rakoff questioned why the $95 million
fine imposed as part of the settlement was less than one-fifth
the fine paid by Goldman Sachs Group Inc in another CDO
case. Goldman settled that case in July 2010 for $550 million.
Rakoff's questions also included: "How can a securities
fraud of this nature and magnitude be the result simply of
negligence?" and "What reason is there to believe this proposed
penalty will have a meaningful deterrent effect?"
The judge also asked "why Citigroup shareholders should pay
rather than culpable individual offenders?" That issue was a
central reason for Rakoff's rejection of the original Bank of
America accord in 2009.
In that case, the judge tossed out a $33 million settlement
with Bank of America Corp over its takeover of Merrill Lynch &
Co. He later approved a revised $150 million accord even as he
called it "half-baked justice at best."
The SEC did file charges against one Citigroup employee
whom it said was primarily responsible for structuring the
transaction. A lawyer for the banker has said there was no
basis for the allegations.
The proposed settlement with Citigroup is the third by the
SEC against a major bank it accused of marketing a CDO without
disclosing it was betting against it or allowing others to do
so. Other settlements include the Goldman accord, and JPMorgan
Chase & Co's agreement in June to pay $153.6 million.
The case is SEC v Citigroup Global Markets Inc, U.S.
District Court for the Southern District of New York, No.