Judge rejects Citigroup’s settlement

Citigroup faces a day of reckoning in court over its selling of financial instruments in the run-up to the subprime mortgage crisis after a New York judge struck down a $285-million settlement with regulators, ruling that the deal obscured an “overriding public interest in knowing the truth”.

Last month Citigroup agreed to s­ettle claims that it misled clients in a $1-billion collateralised debt obligation, an investment linked to subprime residential mortgages. Investors lost about $700-million, according to the Securities and Exchange Commission, whereas the bank made $160-million in fees and trading profits.

It comes as the leading US financial institutions are still trying to reach agreements with authorities over their share of the blame in the run-up to the 2008 credit crunch, from which the world economy is still struggling to recover.

Judge Jed Rakoff said Citigroup’s out-of-court deal would have imposed penalties but allowed it to deny allegations that it misled investors. “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,” Rakoff wrote in his opinion.

The judge consolidated the case with a suit brought against Citigroup employee Brian Stoker, who was responsible for structuring the collateralised debt obligation, said the commission. He set a trial date for July 16 2012. Citigroup may try for a revised settlement, which would also have to be approved by Rakoff.

Chicago-based securities attorney Andrew Stoltmann called Rakoff’s decision “historic”. “This is horribly embarrassing for the Securities and Exchange Commission. A federal judge is basically telling them to do their job,” he said.

Stoltmann said federal judges had often been little more than a rubber stamp of approval for the commission. “Imposing fines without admitting liability is a legal charade that has been going on for decades,” he said.

It is common for the commission to reach settlements with banks that do not contain an admission of liability. Formally admitting liability would give a powerful boost to investors suing the bank as well as landing the bank with a public-relations problem. For the commission it reduces the chances of a costly court case and avoids the uncertainty of a trial.

Rakoff has been a consistent critic of the commission’s tactics. In September 2009 he rejected the regulator’s settlement with Bank of America over claims it misled investors about bonuses paid to Merrill Lynch, which the company had taken over that year. The deal suggested “a rather cynical relationship between the parties,” he said. “The Securities and Exchange Commission gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger,” Rakoff said.

“The bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense of not only the shareholders but also of the truth.” —

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Related stories

2019: The ones who left us

From Uyinene Mrwetyana, Oliver Mtukudzi to Xolani Gwala, Mail & Guardian remembers those who have passed on

More battles ahead for domestic worker unions

Florence Sosiba, speaks to the Mail & Guardian about how important domestic workers are and exclusion in the COIDA

“Life has been good to me, considering where I come from” – Xolani Gwala

Just over a year ago, veteran radio presenter Xolani Gwala’s cancer was in remission. He spoke to the Mail & Guardian once he was back on air.

Kanya Cekeshe’s lawyer appeals decision not to grant him bail to the high court

Kanya Cekeshe’s legal team filed an urgent appeal at the Johannesburg high court on Tuesday against Monday’s judgment by magistrate Theunis Carstens.

Leader’s principal aim to build IFP

Gravitas: Velenkosini Hlabisa brings his experience to his new post as leader of the Inkatha Freedom Party.

Police Minister Bheke Cele addresses Jeppestown

Police minister Bheki Cele visited Jeppestown on Tuesday to speak to business owners and community leaders.

Subscribers only

Free State branches gun for Ace

Parts of the provincial ANC will target their former premier, Magashule, and the Free State PEC in a rolling mass action campaign

SAA bailout raises more questions

As the government continues to grapple with the troubles facing the airline, it would do well to keep on eye on the impending Denel implosion

More top stories

Hawks swoop down with more arrests in R1.4-billion corruption blitz

The spate of arrests for corruption continues apace in Gauteng and the Eastern Cape.

Catholic NGO boss accused of racism and abuse in Sudan

The aid worker allegedly called his security guard a ‘slave’

Agrizzi too ill to be treated at Bara?

The alleged crook’s “health emergency” — if that is what it is — shows up the flaws, either in our health system or in our leadership as a whole

SANDF hid R200m expenditure on ‘Covid’ drug it can’t use

Military health officials are puzzled by the defence department importing a drug that has not been approved for treating coronavirus symptoms from Cuba

press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday