Judge Challenges Citi-SEC CDO Settlement

Manhattan Federal District Court Judge Jed Rakoff is at it again. The other week, Citigroup agreed to pay $285 million to settle charges relating to a CDO tied to the housing market. There was some indication that that might be the only Citigroup CDO that the SEC was interested in pursuing. And although Citi agreed to pay the money, it did not admit any wrongdoing. 

Well, that’s gotten Judge Rakoff a bit perturbed.
 
The settlement was before the judge yesterday but the judge didn’t just approve it. In fact, he signed an order setting a hearing for November 9 to determine whether the proposed settlement is “fair, reasonable, adequate, and in the public interest.” What’s particularly interesting about the court’s order is that it says that the court “will want” the following questions answered at the hearing:
 
1)      Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?
2)      Given the SEC's statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the S.E.C.'s charges are true? Is the interest even stronger when there is no parallel criminal case?
3)      What was the total loss to the victims as a result of Citigroup’s actions? How was this determined? If, as the S.E.C.’s submission states, the loss was "at least”$160 million, what was it at most?
4)      How was the amount of the proposed judgment determined? In particular, what calculations went into the determination of the $95 million penalty? Why, for example, is the penalty in this case less than one-fifth of the $535 million penalty assessed in SEC v. Goldman Sachs & Co., No. 10 Civ. 3229, at *1 (S.D.N.Y. July 20! 2010) (BSJ)? What reason is there to believe this proposed penalty will have a meaningful deterrent effect?
5)      The SEC’s submission states that the SEC has "identified nine factors relevant to the assessment of whether to impose penalties against a corporation and, if so, in what amount.” But the submission fails to particularize how the factors were applied in this case. Did the S.E.C. employ these factors in this case? If so, how should this case be analyzed under each of those nine factors?
6)      The proposed judgment imposes injunctive relief against future violations. What does the SEC do to maintain compliance? How many contempt proceedings against large financial entitities has the SEC brought in the past decade as a result of violations of prior consent judgments?
7)      Why is the penalty in this case to be paid in large part by Citigroup and shareholders rather than by the "culpable individual offenders acting for the corporation?" If the SEC was for the most part unable to identify such alleged offenders, why was this?
8)      What specific "control weaknesses" led to the acts alleged in the Complaint? How will the proposed "remedial undertakings" ensure that those acts do not occur again?
9)      How can a securities fraud of this nature and magnitude be the result simply of negligence?
 
According to the court, the parties should be prepared to answer these questions in detail at the November 9 hearing. In addition, the parties are permitted, but not required, to file with the court written answers to these questions in advance of the hearing, provided such submissions are filed no later than noon on November 7, 2011. 
 
It will be very interesting to see if this leads to a rejection of the proposed settlement or just a little bit of heat.