Rakoff Rejection of Citi / SEC Settlement Pierces Wall Street’s Alice-in-Wonderland Thinking

by zamassoc on November 29th, 2011 at 6:17 pm : Comments 000

Below is a recent article published by Securities Lawyer Jake Zamansky on Forbes.com:

It’s not every day that a federal judge issues a landmark decision, particularly one that could help investors wanting to sue giant financial institutions. But that’s what happened Monday, when U.S. District Judge Jed Rakoff rejected a proposed $285 million settlement between Citigroup and the Securities and Exchange Commission that would have allowed Citi to put the SEC’s mortgage-backed-securities case in the rear-view mirror.

The SEC claims that Citigroup misled investors in a $1-billion fund holding assets the bank had projected would lose money. And just as Citigroup was selling the fund to investors, it shorted many of the fund’s underlying assets for its own account.

Under the proposed settlement, Citigroup would have avoided admitting any wrongdoing. Instead, Judge Rakoff struck a blow for investors by employing a little common sense-he essentially ruled that if a court is going to sign off on a settlement, it has to understand the merits of the allegations.

Since 1972, the SEC has allowed defendants like Citigroup to settle cases and pay substantial fines without admitting liability. Why should a bank pay a huge fine without admitting wrongdoing? According to Bloomberg news, the SEC adopted that policy so defendants could later claim publicly-and in private litigation-that they really hadn’t done anything wrong.

Such is the Alice-in-Wonderland logic of Wall Street. In the case of Citigroup, the bank was apparently happy to write a check for $285 million, as long as it didn’t have to admit it had done anything wrong. That admission would make for bad publicity for banks like Citigroup and also hand a hammer to investors looking to sue the bank.

Judge Rakoff is telling us that these “no-fault” settlements make no sense. How can a judge sign off on such a settlement when he or she doesn’t have enough facts to fairly evaluate it?

His decision also means that the SEC should only start fights it can finish, and shouldn’t plan on “wrist-slap” settlements. “If the allegations of the complaint are true, this is a very good deal for Citigroup,” he wrote. “Even if they are untrue, it is a mild and modest cost of doing business.”

Rather than allow Citi-or really its shareholders-to just cut a check and move on, Rakoff scheduled a public trial regarding Citi’s misconduct for this coming July.

The four-years-and-counting Great Recession, caused in large part by Wall Street’s deceptive packaging subprime-mortgage junk products, has apparently had an impact on Judge Rakoff’s thinking. “In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth,” Judge Rakoff wrote. The proposed settlement is “neither fair, nor reasonable, nor adequate, nor in the public interest.”

Thank you, Judge Rakoff, for forcing Wall Street to finally face the music instead of allowing them to go on living in Wonderland.

Disclosure: Zamansky & Associates are securities attorneys representing investors in arbitrations and state and federal litigations against financial institutions, including Citigroup.

Read article by Securities Attorney Jake Zamansky on Forbes.com

Filed under Citigroup, SEC, Wall Street
and Citigroup