The Untold Story Of Why Judge Rakoff Rejected The Citi Settlement

How many times have you read about a settlement between the government and a corporation or individual which reads something like this:

“Corporation X agrees to pay a $X million fine to settle the allegations without admitting nor denying any wrongdoing.”

It always seems like the government is just going for the quick win and in the meantime they get to pick up some cash for the general purposes fund. To be fair, the government doesn’t have the resources to fight every case and in the ones that seem more difficult, they probably are happy to just settle. But there are some cases that probably should have a tougher penalty or go to trial. Yesterday, Judge Rakoff decided that the SEC had given up too easy on its case against Citigroup. The NY Times summarized   the case against Citigroup as:

“According to the Securities and Exchange Commission, Citigroup stuffed a $1 billion mortgage fund that it sold to investors in 2007 with securities that it believed would fail so that it could bet against its customers and profit when values declined. The fraud, the agency said, was in Citigroup’s falsely telling investors that an independent party was choosing the portfolio’s investments. Citigroup made $160 million from the deal and investors lost $700 million.”

What happened here? Why all of the sudden did a judge decide that admitting nor denying was no longer going to be acceptable?

We think our friends over at Better Markets may have had something to do with this. Back on November 6, they went to court to try and stop the SEC settlement with Citigroup   Read Better Markets complaint here  They said, “The SEC provided so little information that it’s is basically asking the court to merely rubber stamp the settlement without scrutinizing it and without knowing much about it.” 

Better Markets was not afraid to stand up and object to a settlement that they thought was too lenient and one where not much information was revealed. After the judge rejected the settlement, Better Markets had this to say :

The SEC’s zeal to wrap up investigations, claim a scalp and get a “quick headline,” as the court noted, must end. The SEC has to get serious about punishing Wall Street for its massive frauds that not only caused enormous investor losses, but also caused the fin`ancial system and economy to collapse,” said Mr. Kelleher. “If no one is held to account for any of that, then it is only a matter of time before the same reckless conduct causes the next crash and requires another massive taxpayer bailout of the banks. “

Wow, those are some tough words. Looks like the bond market may have to move over because there is a new vigilante on Wall Street.