SEC Wins Emergency Stop In Citigroup Fraud Case

The Securities and Exchange Commission won a delay in its securities fraud lawsuit against Citigroup Inc, as the regulator tries to appeal a judge's decision to reject its $285 million settlement with the bank.

The case will be put on hold until a motions panel on January 17 begins considering the SEC's bid for a longer delay so it can pursue an expedited appeal, the 2nd U.S. Circuit Court of Appeals in New York said in its order on Tuesday afternoon.

That order was made public 78 seconds before U.S. District Judge Jed Rakoff, who rejected the Citigroup settlement last month, issued a ruling opposing any delay in the case, court records show. Citigroup supported the SEC's request for a delay.

The rulings come as the SEC tries to ensure it can continue settling enforcement cases without requiring corporate defendants to address whether they did anything wrong.

That practice was called into question when Rakoff on November 28 harshly rejected the proposed settlement with New York-based Citigroup.

He said the SEC's failure to require Citigroup to admit or deny its charges left him no way to know whether the settlement was fair. Rakoff also called the $285 million payout "pocket change" for the third-largest U.S. bank.

But the SEC said that ruling was "legal error," at odds with decades of court decisions allowing such settlements and letting investors get faster recoveries, and could affect its ability to reach similar accords with other companies.

SEC spokesman John Nester declined to comment. Citigroup spokeswoman Danielle Romero-Apsilos repeated that the bank disagreed with Rakoff's November 28 decision, and would have "substantial factual and legal defenses" at a trial.

The October 19 settlement was intended to resolve charges that Citigroup sold $1 billion of risky mortgage-linked securities in 2007 without telling investors that it was betting against the debt, and caused more than $700 million of losses.

Citigroup's $285 million payment was to include $160 million of disgorged profit and fees, $30 million of interest and a $95 million civil fine.

IRREPARABLE HARM, OR ILLUSORY HARM?

In a filing on Tuesday morning with the 2nd Circuit, the SEC said the urgency to put the case on hold came after Rakoff in a teleconference this month told Citigroup to answer the charges by January 3, 2012 - or 27 days sooner than federal rules require.

An answer can force Citigroup to deny some or all of the SEC allegations, or seek to dismiss the case entirely.

But this would cause the SEC "irreparable harm" by forcing it to devote substantial resources to the case, and would "disrupt a central negotiated provision" in which Citigroup agreed not to deny the allegations, the regulator said.

In his decision on Tuesday, which the motions panel may choose to follow or not follow, Rakoff said it is "patently clear" there was no statutory basis to appeal his November 28 ruling, and "derail the orderly conduct" of the case.

The judge said this was because the appeal focused on his alleged error in demanding more facts about the case, rather than on the injunctive relief provided by the settlement.

He also said the alleged harm faced by the SEC was "largely illusory" because the regulator is pursuing a related case arising out of the same facts against a Citigroup employee, director Brian Stoker, who contests the regulator's charges.

The SEC has asked Congress for authority to seek larger penalties in corporate cases than the law now allows.

Rakoff has set a July 16, 2012 trial date.

The cases are SEC v Citigroup Global Markets Inc, 2nd U.S. Circuit Court of Appeals, No. 11-05227; and U.S. District Court, Southern District of New York, No. 11-07387.

(Reporting by Jonathan Stempel in New York; Editing by Gary Hill)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[Jack Spratterino]

01:02 PM on 03/15/2012

Can Rakoff's ruling if applied and presuming it then would cause a judicial review of all the bank cases resulting in a decision with substantially higher gargantuan fines for all thebanks, wreck our whole financial system? I think so though the money gained by a decision for the plaintiffs when spent could cause a an economic boom ? No ? Dream on MacDuff you say? Oh yes the plaintiffs lawyers would probably keep most of it too or spend the money on Bentley's or Rolls Royces not American cars ..

[Jack Spratterino]

12:41 PM on 03/15/2012

Eh! Whatsamatter ? Ya punish only one bank for the same so -called crime all the other banks did too ? Making an EXAMPLE ? That's not justice.Judge Rakoff's mental reasoning ability should be called in question I'd say........UNLESS he wants the court to review all of the similar bank cases and punish them too? Is that a legal possibility or a procedural violation??

[parabq]

02:16 PM on 12/30/2011

America is in the craphole and Americans allowed it !!!!!!!!!!!! Obviously they
dont have the huevos to stand up and say anything !!

[kamact]

09:16 AM on 12/30/2011

The SEC is a tool for the TBTF banksters,...and generally disserves most Americans,...

[Captain Hindsight]

03:32 PM on 12/29/2011

At the least they be required to pay the entire loss back to the investors $700 million and fines and interest added. They also needto admit wrongdoing so that the other victims who ended up losing homes or home value can be compensated for their criminal actions.

[Kenneth Alton]

12:20 PM on 12/29/2011

Honesty compels me to say that, having worked with regulators before, I'm on the fence on this.

The ability of a regulator to reach a binding accord without admissions of guilt or wrongdoing by the institutions they regulate is part and parcel of the current regulatory model of openness and candor. Yet as is evidenced by the past decade, that model has failed. The question then becomes is the flaw in the model or the implementation?

Judge Rakoff, in rejecting a settlement last month, has effectively proposed a more adversarial relationship. Yet in current regulatory practice there's no presumption of innocence. Regulators don't need to prove anything - they simply rule one way or another. This is balanced by the more... cooperative... process by which any corrective remediation is achieved.

Further, a truly adversarial model would not only hamper regulatory scrutiny, it would weaken all regulators ability to see into the markets. The current regulatory process serves as a back-channel for the development of best practices among auditors, firms, and market participants. It also allows for a degree of market stabilization by preserving the appearance of order by hiding all sorts of unsavory messes behind a polite veil. (Markets are a bit like sausage - you really don't want to know what's in there.)

Current regulatory practice has failed to produce long term market stability, so Judge Rakoff is correct in challenging decades of past court decisions allowing such settlements. Yet his actions may not be the answer.

[skippythepinhead]

10:39 AM on 12/30/2011

However, there is a new legal context created by the Supreme Court in Citizens. A proper ruling by an appeals courts ought to include the new responsibilities concomitant with the new rights of corporations as citizens.

[Kenneth Alton]

01:36 PM on 12/30/2011

And yet, if corporations have rights under the Constitution as "persons", as "people" than might not ownership of corporations constitute slavery, something specifically prohibited under the Constitution?

The Supremes have played rather fast and loose with personhood as it applies to corporations, and they well know it, making of it an article of convenience more than principle, as Sclia tacitly acknowledged when he said in FCC vs AT&T (which rejected AT&T's argument that the word "person" means corporations have a right to "personal privacy") "We trust that AT&T will not take it personally..."

LOL

[seepositives]

11:39 AM on 12/29/2011

all these negotiated settlements should first clear whether they admit culpability or atre just paying. id like to get to know what they did.

[hipocampelofantocame]

07:37 PM on 12/28/2011

Having the SEC in charge of any settlement cases with any entity seems to be a
larcenous endeavor. Change the personnel and the rules.

[Angrysheepherder]

05:24 PM on 12/28/2011

The Rakoff ruling shines a light on the way these crappy settlements have evolved into a kind of cheap payoff system, in which crimes may be committed over and over again, and the SEC’s only role is to take a bribe each time the offenders slip up and get caught.

If you never have to worry about serious punishments, or court findings of criminal guilt (which would leave you exposed to crippling lawsuits), then there’s simply no incentive to stop committing fraud. These SEC settlements simply become part of the cost of doing business, as Rakoff notes:

As for common experience, a consent judgment that does not involve any admissions and that results in only very modest penalties is just as frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies. This, indeed, is Citigroup's position in this very case.

Read more: http://www.rollingstone.com/politics/blogs/taibblog/federal-judge-pimp-slaps-the-sec-over-citigroup-settlement-20111129#ixzz1hs3PDJVf

[Angrysheepherder]

05:22 PM on 12/28/2011

"This practice is a legal absurdity for several reasons. By accepting hundred-million-dollar fines without a full public venting of the facts, the SEC is leveling seemingly significant punishments without telling the public what the defendant is being punished for. This has essentially created a parallel or secret criminal justice system, in which both crime and punishment are adjudicated behind closed doors."

"Judge Rakoff blew a big hole in that practice yesterday. His ruling says secret justice is not justice, and that the government cannot hand out punishments without telling the public what the punishments are for. He wrote:"

Finally, 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. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances."

Read more: http://www.rollingstone.com/politics/blogs/taibblog/federal-judge-pimp-slaps-the-sec-over-citigroup-settlement-20111129#ixzz1hs2FIBu4

[Morgan378]

05:06 PM on 12/28/2011

OH, so the SEC want's "FAST RECOVERIES" and to Hell with putting CitiGroup executives in jail? Oh, now I see,....So ONE EXCLUDES THE OTHER. Hmmm. Sounds like the SEC need take a look at their case and see - AS DO MOST AMERICANS - they mostly DON'T GIVE A DAMN about "FAST RECOVERIES" and would prefer the CitiGroup executives in question HANG BY THEIR FRICKIN' GIVENCHY TIES! Causing $700 MILLION in losses and they're only paying $285 MILLION in losing this case? Hmmm, now I mighta not done all that well in Algebra - but I can balance a checkbook so I feel I'm amongst MILLIONS of Americans who'd PREFER the bastad's HANG! Screw what the Wall Street packed minions of the SEC wants - I go with the Judge on this one. They're just twistin' and winding around the noose trying to get loose is all.

[johnlwheeler2]

03:57 PM on 12/28/2011

Who is black mailing who, our is it extortion by the banks because it is with out a doubt the most lenient punishment I can imagine.What is the difference between Bernie M. and the big BANKSTERS they all cheated and lost.Swamping a lot of small craft in the Financial Tsunami they created.The SEC and the rating agencies watched by satellite I quess.

[xanadu4024]

03:35 PM on 12/28/2011

Gotta love the fall out from repeal of Glass-Steagall Act back in 99 by Clinton, hahahahaha

[Morgan378]

05:07 PM on 12/28/2011

Well, yeah - but your friend Gingrich sealed the deal.

[xanadu4024]

06:21 PM on 12/28/2011

You forget it may start in Congress but the BUCK stopped with Clinton. I remember when hearing were going on, the excuse was that Glass-Steagall along with all the other legislation/regulation was hurting the financial industry,,, yeah right. Greedy "bankers" hated that companies had walls and if you crossed those you got shut down. With Gramm-Leach-Bliley act it let them lump all eggs in one basket and if it fell they all break. Remember Reagan was sold bill of goods on one time amnesty on illegal aliens to get more border control, then after they got it nothing went forward as promised. Same happened when Bush senior promised no new taxes, but Dems pushed old tax rates higher, good thing economy was running strong from Reagans rebuild,,,it lasted through most of Clintons reign, and cuts the Rebulicans pushed Clinton to make did work, except he cut in wrong places giving us little middle east intel leading to 9/11. See when middle east goes from 4400 assets to less than 400, thanks to Clinton, we had little info. See Clintons "balanced" budget was simply him cutting to meet what Congress, led by Gingrich FORCED him to do. See if people take their heads out of propaganda bags(yes some things done by republicans didnt work, but rarely hurt anyone like socialist elite rising during Clinton) and look at history and what each person did, it really hurts old order Democrats, as new ones arent Democrats but socialists

[Grimway]

03:24 PM on 12/28/2011

So the SEC wants to allow crime for a fee for eternity? Thats was not your intended role. Supporting the criminals? REALLY?

[stripedbass7]

03:12 PM on 12/28/2011

If The Banks Steal Defraud Etc. Lets say a Billion $$$$$$$$. I think they Should pay Back 2 Billion$$$$$$$. Make the Fraudsters Pay. Having the Banks Just Give back What they Stole is insane.....