* $285 mln settlement tied to housing-related CDO
* Judge has threatened to reject similar SEC settlements
* Court hearing set for Wednesday
By Jonathan Stempel
Nov 7 (Reuters) - The U.S. Securities and Exchange Commission tried to convince a skeptical judge that a proposed $285 million civil settlement with Citigroup Inc over alleged fraud involving toxic mortgage debt is fair — even though investors may have lost more than twice that amount.
U.S. District Judge Jed Rakoff had ordered both sides to answer nine questions about the Oct. 19 accord, including why Citigroup was not required to admit or deny wrongdoing.
The judge previously has threatened to reject similar SEC settlements. That sets the stage for a possible showdown at a Wednesday court hearing, at which he will also consider whether the settlement is in the public interest.
SEC Chairman Mary Schapiro defended the practice of not requiring admissions of wrongdoing, saying other regulators also use it and that it can avoid years of litigation.
“Our goal is to get money quickly back to investors,” she told reporters at a Securities Industry and Financial Markets Association conference in New York. “Then we can turn our limited resources back to the next case.”
The SEC had accused Citigroup of selling a mortgage-linked investment at the same time it bet the debt would fail.
Charges against the bank relate to the sale of a $1 billion collateralized debt obligation known as Class V Funding III in 2007, as the housing market was beginning to collapse.
Citigroup’s $285 million payment would include $160 million representing ill-gotten profit, $30 million of interest, and a $95 million fine.
One Citigroup employee, director Brian Stoker, was also charged by the SEC. He has contested the charges.
In court papers filed on Monday, the SEC said it is “reasonable to estimate” that investor losses from the CDO will be “in excess of $700 million,” after earlier estimating a loss of “several hundred million dollars.”
But the regulator said Citigroup’s $160 million of fees and ill-gotten gains were the proper measure of damages, not the amount of losses, and that it therefore “did not devote resources” to calculate the precise amount of those losses.
The SEC also said the accord does not unfairly harm shareholders, who were not victims of the transaction but rather were “indirect financial beneficiaries.”
The SEC also defended the $95 million fine, less than one-fifth what Goldman Sachs Group Inc paid in a 2010 SEC settlement, saying that Citigroup was charged only with negligence, while Goldman was more culpable.
Citigroup said in a separate court filing that prolonging its case could make it harder to defend against other mortgage lawsuits. It said it used appropriate judgment “to determine how much of the shareholders’ money should be used to settle.”
The bank also said the SEC did not identify any superiors of Stoker who knew enough about the transaction or alleged inadequate disclosures to be charged.
Lawyers for Stoker did not immediately respond to a request for comment.
The SEC and other regulators face pressure from lawmakers and the public to hold Wall Street executives accountable for their role in the 2008 crisis and subsequent recession.
Rakoff’s nine questions also addressed matters such as why the fine was not larger, and why no individuals were held financially responsible.
The judge is known for having in 2009 rejected the SEC’s proposed $33 million settlement with Bank of America Corp over that bank’s takeover of Merrill Lynch & Co. He later approved a $150 million accord.
On Monday, a group of life insurers suing Citigroup over other mortgage debt in a court filing asked Rakoff to allow public access to documents reviewed by the SEC. A nonprofit advocacy group, Better Markets, in a Nov. 5 filing urged Rakoff to reject the accord, calling the sanctions inadequate.
In approving an SEC settlement with Vitesse Semiconductor Corp in March, Rakoff had threatened to reject future accords that do not require corporate defendants to address whether they committed wrongdoing.
“The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the SEC,” he wrote. “The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the SEC; but, by gosh, he had better be careful not to deny them either.
“One thing is left certain: the public will never know whether the SEC’s charges are true,” he added.
The case is SEC v Citigroup Global Markets Inc, U.S. District Court, Southern District of New York, No. 11-07387.