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Federal Judge Jed S. Rakoff rejected an SEC settlement with Citigroup on Monday. The decision may have ramifications beyond the current case.
Citigroup was charged with negligence for selling customers funds known as Class V Funding III. The mortgage securities fund was populated by securities chosen by Citigroup, though the bank told investors they were picked by an independent third party. The bank then bet against their own fund, predicting that it would lose value.
And it did. Investors lost $700 million, while Citigroup gained $160 million in profits, according to the SEC. The rejected settlement would have allowed Citigroup not to admit any wrongdoing. They would have paid out $285 million.
Judge Rakoff questioned the settlement, specifically that the SEC decided to charge the bank with negligence instead of knowing or intentional fraud.
The federal judge also wrote in his decision that the settlement was "neither fair, nor reasonable, nor adequate, nor in the public interest."
If other judges fallow in Rakoff's footsteps, the SEC may soon have to approach settlements in a new way. Allowing banks to settle without admitting wrongdoing is one tool that the SEC uses to encourage settlement. Many financial institutions will refuse to settle if they do have to admit wrongdoing, as this admission can be used against them in private lawsuits from individual investors, reports The Washington Post.
For now, Citigroup and the SEC have several options open to them. They can try to appeal the ruling, but risk having an appeals court affirm Judge Rakoff's decision. Or, they can go to trial, which can result in a lengthy and costly delay. The SEC settlement could also be re-worked with Citigroup in such a way that the federal judge will approve its terms.