Tornado Alley (PROG)

[StephanieVanbryce]

Judge in Citigroup Mortgage Settlement Criticizes S.E.C.’s Enforcement

By PETER LATTMAN November 9, 2011, 11:05 pm

A federal judge overseeing a $285 million settlement between Citigroup and the Securities and Exchange Commission expressed major concerns on Wednesday about the agency’s enforcement practices.

The settlement would effectively close the book on regulators’ accusations that the bank deceived investors in the sale of mortgage securities. The judge, Jed S. Rakoff of the Federal District Court in Manhattan, reserved judgment on whether he would sign off on it, explaining that he would issue a written opinion at a later date.

Yet the judge made it clear during an hourlong hearing in a crowded courtroom that he had serious concerns about how the commission reached such settlements — and whether they were tough enough.

“Doesn’t the S.E.C. have an interest in what the truth is?” Judge Rakoff asked, in reference to the commission’s longstanding practice of not forcing a defendant to admit any wrongdoing when settling a case.

Matthew T. Martens, a senior lawyer at the S.E.C., said that the government believed that the public knew the truth about Citigroup’s conduct because the government’s lawsuit laid out its claims against the bank.

“Last time I checked, correct me if I’m wrong, anyone can make an allegation,” said Judge Rakoff. “The mere fact that you say it’s so does not make it so unless it’s proved.”

Underscoring the importance of the case for the agency, Robert S. Khuzami, the S.E.C.’s director of enforcement, and George S. Canellos, the head of its New York office, attended the hearing. Ever since the financial crisis, political leaders and academics have accused the S.E.C. and other government agencies of going too easy on Wall Street and turning a blind eye to excessive risk taking.

The S.E.C.’s detractors have criticized how the commission resolves enforcement actions against Wall Street firms. They view the settlements as toothless, effectively nothing more slaps on the wrist that lead to chronic violations of the securities laws.

On Wednesday, the S.E.C. responded to such criticism by announcing that it had filed 735 enforcement actions in the 12 months ending Sept. 30, the most filed in a single year. In a statement, Mary L. Schapiro, the S.E.C. chairwoman, highlighted that many of the cases were “related to the financial crisis and its aftermath.”

The case against Citigroup is the third brought by the S.E.C. that accuses a bank of misleading clients about mortgage securities. Goldman and JPMorgan Chase each settled their cases last year.

Citigroup was accused of deceiving its customers by selling them $1 billion worth of risky mortgage securities that it knew would fall in value.

The $285 million settlement with the government encompasses $160 million in disgorged profits, a $95 million penalty and $30 million in interest.

A federal judge must approve all S.E.C. settlements, and, historically, most have rubber stamped them.

But not Judge Rakoff. In September 2009, the 68-year-old jurist scrapped a proposed $33 million settlement between the S.E.C. and Bank of America over the bank’s acquisition of Merrill Lynch. He called the pact a sweetheart deal done “at the expense, not only of the shareholders, but also of the truth.” The judge later approved a $150 million settlement.

Other judges have recently shown hostility toward the agency’s settlement practices. Last year Judge Ellen S. Huvelle in Washington refused to approve a $75 million agreement between the commission and Citigroup over the value of its subprime mortgages until the parties tweaked the deal’s terms.

Judge Rakoff first made his skepticism over the S.E.C.’s pact with Citigroup known last month when he asked the two sides to answer nine pointed questions about why he should approve it.

On Wednesday, the judge homed in on the issue of banks who settle with the S.E.C. and pledge to not violate the securities laws, yet repeatedly do so. Why then, Judge Rakoff asked, had the commission not brought any contempt charges against large financial firms in the past 10 years?

Mr. Martens, the S.E.C. lawyer, said that the agency felt that there were better and more appropriate ways to deal with chronic misconduct. The S.E.C. has said that striking settlements is often preferable to a costly and protracted lawsuit that it might lose.

Judge Rakoff called the contempt power — a judge’s ability to punish a party for disobeying a court order — “the backbone of the judiciary.” He questioned whether the S.E.C. was really serious about ever seeking an injunction against repeat offenders.

“It’s just for show,” Judge Rakoff said.

“We’re not saying that we will never use injunctive relief,” said the S.E.C. lawyer.

“Hope springs eternal,” the judge replied.

The S.E.C.’s current enforcement action against Citigroup is at least the fifth time that the commission has reached a settlement with the bank related to civil fraud accusations.

Citigroup’s main brokerage subsidiary, its predecessors or its parent company has agreed to not violate the antifraud laws in prior settlements with the S.E.C. dating as far back as April 2000.

A Citigroup spokesman said that “there is no basis for any assertion that Citi has violated the terms” of any agreement with the S.E.C.

After being slow to enter the subprime mortgage loan packaging business, Citigroup plunged headfirst just as the housing boom neared its peak. When the market melted down, Citigroup was saddled with more than $30 billion in losses and ultimately needed two federal bailouts.

The bank also found itself in the crosshairs of securities regulators and Congressional investigators, as well as the target of large private investor lawsuits.

It is unclear whether Judge Rakoff will allow the bank to resolve this case under its current settlement terms. On Wednesday, the judge criticized the $95 million penalty against the bank, pointing out that the S.E.C. estimated investors’ total losses on the mortgage deal at $700 million.

“So the net effect of this is that you’re only returning a small fraction of what the investors lost, yes?” Judge Rakoff asked the S.E.C. lawyer.

Later in the hearing, the judge teased Brad S. Karp, the lawyer for Citigroup, about the penalty amount.

“I won’t be cute and ask what percentage of Citigroup’s net worth is $95 million because I do not have a microscope with me.”



http://dealbook.nytimes.com/2011/11/09/judge-in-citigroup-mortgage-settlement-criticizes-s-e-c-s-enforcement/

How SHAMEFUL is THIS ? The JUDGE HAS TO SCOLD the SEC LAWYERS !!!.....They must be working for the 1 PERCENT too !