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Citigroup's $285 Million Settlement Rejected (Update 1)

Citigroup article updated to include company and SEC statements.

NEW YORK ( TheStreet) -- A federal judge rejected a proposed $285 million settlement between Citigroup (C - Get Report) and the Securities and Exchange Commission over a $1 billion mortgage-bond deal and ordered a fresh trial.

Judge Jed Rakoff said in an order Monday that the pact was "neither reasonable, nor fair, nor adequate, nor in the public interest," according to a Reuters report. He set a trial date for July 16, 2012.

The SEC had accused Citigroup of misleading investors in a sale of securities backed by mortgages that it then bet against. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select, the SEC said.

Citigroup agreed to settle the SEC's charges by paying $285 million, but neither admitted nor denied the charges. The SEC has reached similar agreements with Goldman Sachs (GS - Get Report) and JPMorgan Chase (JPM - Get Report).

Rakoff has been strongly opposed to this practice by the SEC and made his stance on the case clear in a Nov.9 hearing. "Last time I checked, correct me if I'm wrong, anyone can make an allegation," said Rakoff told SEC lawyer Matthew Martens, according to a New York Times report. "The mere fact that you say it's so does not make it so unless it's proved."

Other issues included why the SEC was recovering only $160 million in illicit profits when investors lost about $700 million. He also didn't think too much of the $95 million the bank has to pay out as an additional penalty for the violation.

"The SEC's long-standing policy--hallowed by history, but not by reason--of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact," the judge said, according to the Wall Street Journal.

" ...the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances," the judge said in his order.

Citigroup said in a statement that it disagreed with the court's ruling. "We believe the proposed settlement is a fair and reasonable resolution to the SEC's allegation of negligence, which relates to a five-year-old transaction. We also believe the settlement fully complies with long-established legal standards," the company said. "In the event the case is tried, we would present substantial factual and legal defenses to the charges."

The SEC also defended its enforcement action. "While we respect the court's ruling, we believe that the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial,"Robert Khuzami, director of the Division of Enforcement, said in statement.

--Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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