* $285 mln settlement tied to housing-related CDO
* Judge Jed Rakoff vigorously questions SEC, Citigroup
* Rakoff had struck down Bank of America settlement
* No timetable for decision
By Jonathan Stempel and Grant McCool
Nov 9 A federal judge made clear he has big
problems with a U.S. regulator's approach to settling major
securities fraud cases, perhaps imperiling a proposed $285
million settlement with Citigroup Inc over the sale of
toxic mortgage debt.
U.S. District Judge Jed Rakoff, whose approval is required
for the accord, grilled a senior U.S. Securities and Exchange
Commission lawyer over why the regulator should accept a payout
far smaller than the estimated $700 million that investors lost
on the transaction, which Citigroup had successfully bet
At an hour-long hearing on Wednesday in Manhattan federal
court, Rakoff also asked why the SEC would agree to bar
Citigroup from similar wrongful conduct when it had no recent
history of bringing contempt charges for violations of similar
prior injunctions, including by that bank.
"It's just for show," Rakoff suggested, while questioning
SEC Chief Litigation Counsel Matthew Martens.
Rakoff did not tip his hand on how or when he will rule.
"This is an important matter, one that in the court's view
raises many interesting issues, and I want to resolve them and
give a written opinion," he said.
The SEC accused Citigroup of selling a $1 billion
mortgage-linked collateralized debt obligation, Class V Funding
III, in 2007 as the housing market was beginning to collapse,
and then betting against the transaction.
One Citigroup employee, director Brian Stoker, was also
charged by the SEC. He is contesting those charges.
Rakoff's approach reflects his impatience with an SEC
settlement process that may appear to not punish wrongdoers
sufficiently, or do enough to prevent them from backsliding.
In March, the judge had warned he might strike down future
SEC settlements that did not force companies to admit or deny
wrongdoing for their alleged improper activity.
The Citigroup settlement requires the third-largest U.S.
bank to give up $160 million of alleged ill-gotten profit, plus
$30 million of interest.
It also imposes a $95 million fine for the bank's alleged
negligence, less than one-fifth what Goldman Sachs Group Inc paid last year in a $550 million SEC settlement over a
"So the net effect of this is that you're only returning a
very small fraction of what the investors lost, yes?" Rakoff
The SEC lawyer responded that the remedy reflects "what we
believe is consistent with our statutory authorization."
Citigroup's fine is barely larger than the record $92.8
million penalty that Rakoff on Tuesday imposed against Raj
Rajaratnam in the SEC's insider trading case against the
now-convicted Galleon Group hedge fund founder. Rajaratnam was
separately sentenced to 11 years in prison and ordered to pay
or forfeit $63.8 million in his criminal case.
Rakoff in 2009 struck down an $33 million SEC settlement
with Bank of America Corp over the takeover of Merrill
Lynch & Co, saying it punished shareholders who were victims of
the alleged fraud. He later approved a $150 million accord.
But the judge's gesticulations from the bench and pointed
questioning reflected his deep discomfort with whether SEC
enforcement in securities fraud cases, even now, is effective.
In questioning Martens, Rakoff asked whether the SEC was
asking him not to consider whether the settlement served the
public interest because it was not the court's role.
"Am I correctly summarizing your position?" Rakoff asked.
"Yes, your honor," Martens said.
"An interesting position," Rakoff then responded. "I'm
supposed to exercise my power but not my judgment."
Martens also rejected the suggestion that by not requiring
Citigroup to admit wrongdoing, the SEC is depriving the public
of learning the truth of what actually occurred.
Rakoff was also tough on Citigroup's lawyer Brad Karp, a
partner at Paul, Weiss, Rifkind, Wharton & Garrison.
After getting Martens to agree that the mortgage securities
that Citigroup sold were "real dogs," Rakoff told Karp, "You're
not selling much of this junk these days, I understand it?"
Karp tried to assure Rakoff that the settlement requires
the bank to impose sufficient compliance measures. "There is no
wiggle room," he said. "You can't miss it."
At one point, Rakoff seemed to enjoy putting the lawyers on
the spot. After ending his questioning of Martens and turning
to Karp, Rakoff told the SEC lawyer: "Let me take you off the
hook for a while -- but don't get too comfortable."
The case is SEC v Citigroup Global Markets Inc, U.S.
District Court, Southern District of New York, No. 11-07387.