Two months after the Second U.S. Circuit of Appeals ruled that he had made a mistake in blocking the $285 million mortgage securities fraud settlement between Citigroup (C) and the SEC, U.S. District Judge Jed Rakoff has approved the deal. Rakoff had originally refused to allow the agreement to go through in 2011, chastising the regulator for letting the firm settle without having to admit wrongdoing.
Following his decision, other judges followed his lead and began questioning certain SEC settlements. The regulator went on to modify a longstanding, albeit unofficial, policy of letting companies settle without having to deny or admit wrongdoing.
Even though Rakoff is approving the deal now, he was clear to articulate his reluctance. In his latest opinion he wrote that he worries that because of the Second Circuit’s ruling, settlements with governmental regulatory bodies, and enforced by the contempt powers of the judiciary, will not have to contend with any meaningful oversight. However, Rakoff said that if he were to ignore the Court of Appeals’ dictates this would be a “dereliction of duty.” Nonetheless, he noted that approving this settlement has left his court with “sour grapes.”
After Rakoff’s refusal to approve the deal a few years ago, the SEC and Citigroup joined forces to appeal his ruling. The Second Circuit found that Rakoff “abused” his discretion and applied the “incorrect legal standard” to the securities case. It remanded the lawsuit back to his court.
The mortgage securities settlement resolves the SEC’s claims that Citigroup misled investors in a $1 billion collateralized debt obligation involving risky mortgages that ended up costing investors $600 million.
Citigroup Judge Approves Accord, Warning of No Oversight, Bloomberg Businessweek, August, 2014
After Long Fight, Judge Rakoff Reluctantly Approves Citigroup Deal, NY Times, August 5, 2014
Approval of SEC-Citigroup Deal Leaves Rakoff With a Case of ‘Sour Grapes’, The Wall Street Journal, August 5, 2014
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Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion, Institutional Investor Securities Blog, July 14, 2014
Deutsche Bank, Wells Fargo, Citigroup Sued by Pimco and Blackrock Over Trustee Roles Involving Mortgage Bonds, Institutional Investor Securities Blog, July 3, 2014
Citigroup’s LavaFlow to Pay $5M to SEC For Not Protecting Subscriber Data in ATS, Stockbroker Fraud Blog, July 28, 2014