On August 5, 2014, U.S. District Judge Jed Rakoff reluctantly approved a$285 million settlement in the SEC’s enforcement action against Citigroup. In SEC v. Citigroup, the SEC alleged that after Citigroup realized in early 2007 that the market for mortgage-backed securities was beginning to weaken, it created a billion-dollar fund to sell some of these assets to investors without disclosing either that Citigroup had exercised significant influence in selecting the assets to include in the fund and had itself retained a $500 million short position in the assets it had helped select.
Judge Rakoff initially declined to approve the proposed consent judgment because he said it lacked “sufficient evidence to enable it to assess whether the agreement was fair, adequate, reasonable, and in the public’s interest.” He was forced to reconsider that position when the Second Circuit ruled, on appeal, that the “primary focus of the [district court’s] inquiry . . . should be on ensuring the consent decree is procedurally proper, . . . taking care not to infringe on the SEC’s discretionary authority to settle on a particular set of terms.” READ MORE →
Summer is coming, but this is probably not the vacation Southern District of New York Judge Jed Rakoff had in mind. On June 4, 2014, the Second Circuit vacated Judge Rakoff’s order refusing to approve the SEC’s $285 million settlement with Citigroup regarding a 2007 collateralized debt obligation (“CDO”) offering. The highly anticipated opinion – the decision did not come down until more than a year after oral argument – sharply limits the instances in which a court may reject or even modify a Commission settlement, even when the SEC does not extract an admission of facts or liability. The decision, which comes at a time when the SEC has been seeking and obtaining more admissions from public companies in connection with settlements, is sure to have a significant impact on the agency’s future approach toward settlements and admissions.
Though the facts of the underlying case are almost a footnote at this point, the SEC had alleged that in 2007, Citigroup negligently represented its role and economic interest in structuring a fund made up of tranches of CDOs. As with similar allegations against Goldman Sachs and its ABACUS CDO, the SEC alleged that Citigroup hand-picked many of the mortgage-related assets in the fund while telling investors that the assets were selected by an independent advisor. The SEC further alleged that Citigroup chose mortgage-backed assets that it projected would decline in value and in which it had taken short positions. Thus, according to the SEC, Citigroup sold investors assets on the hope the CDOs would increase in value, while Citigroup had selected and bet against these same assets on the belief they would actually decrease in value. The SEC alleged that Citigroup was able to reap a substantial profit from shorting the assets it selected for the fund, while fund investors lost millions.
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