A federal judge in Manhattan rejected a proposed $285-million settlement… (Justin Sullivan, Getty…)
Reporting from New York — A federal judge in New York issued a stern challenge to the government's recent history of imposing "relatively modest" punishments on big Wall Street banks for wrongdoing during the financial crisis.
Jed Rakoff, a federal judge in Manhattan, issued a sharply worded order Monday rejecting a proposed $285-million settlement between the Securities and Exchange Commission and Citigroup Inc. that would have allowed the bank to avoid admitting it defrauded investors over toxic mortgage securities. He said that other similar settlements had not stopped banks from breaking the law, and added that the fines are "pocket change to any entity as large as Citigroup."
Rakoff's order echoes public anger that the banks have been let off too easily for their role in causing the financial crisis that peaked in 2008. It also has the potential to affect future fraud cases that the SEC enters into with Wall Street firms that do not want to admit they violated the law — a key step that helps shelter them from further civil litigation.
"He wants them to dig deeper," Anthony Sabino, a law professor at St. John's University, said of Rakoff. "What he's looking for is for more specific naming of names in order to protect the public from this happening again."
Rakoff has been a vocal critic of SEC settlements and has a history of shaking up the financial industry after a career in the U.S. attorney's office in Manhattan, where he prosecuted securities fraud. Analysts believe that his decision on the Citi settlement will influence other judges grappling with similar cases.
"Judge Rakoff is an extremely intelligent and well respected judge and therefore any judge would read what he's written," said Marty Perschetz, a lawyer with the firm Schulte, Roth & Zabel.
In the Citi case, Rakoff must approve any final settlement. He said in his order Monday that barring a new settlement that meets his requirements, the two sides should prepare to go to trial in July.
The SEC's director of enforcement, Robert Khuzami, said in a statement that the steps called for by Rakoff would eat up the agency's resources and time and "would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors."
A spokeswoman for Citi, Danielle Romero-Apsilos, said "in the event the case is tried, we would present substantial factual and legal defenses to the charges."
The proposed settlement with Citi is the latest in a long line of cases against Wall Street banks that the SEC has sought to end with a negotiated settlement.
Last year, Goldman Sachs Group Inc. paid $550 million to settle accusations that it had misled its clients about the quality of mortgage-backed securities that the bank sold before the financial crisis. JPMorgan Chase & Co. paid $153 million to settle allegations in a similar case.
In both cases, in exchange for paying the fine, the banks were let off without admitting to the allegations.
The SEC proposed a similar settlement with Citi in October after alleging that the bank had sold its clients low-quality mortgage-backed securities that the bank planned to bet against. The investors ended up losing about $700 million from the deal while Citi made about $160 million.
Judges must sign off on such settlements and have generally deferred to the SEC when the agency has asked for a settlement, but Rakoff said such an approach has let the banks off too easily and denied the public its right to know what happened.
"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.
This is not the first time Rakoff has questioned a settlement between the SEC and a big bank. Most famously, he criticized the agency's willingness to settle with Bank of America Corp. after the bank was accused of misleading investors about its purchase of brokerage Merrill Lynch. In that case, Rakoff ended up grudgingly signing off on the settlement.