U.S. District Court Judge Jed S. Rakoff has been asked by the SEC and Citigroup to approve a settlement of charges that Citigroup misled investors in a $1 billion dollar CDO deal called Class Funding III that was tied to residential mortgage-backed securities. Citigroup would pay a $95 million penalty and not admit fault. The Judge has some tough questions that he wants answered at a hearing before him in his courtroom on November 9.
According to the SEC, Citigroup structured and marketed a “built to fail” CDO called Class V Funding III, in which it significantly influenced the selection of $500 million of the mortgage-backed securities in the CDO’s portfolio. Citigroup then took a proprietary short position against those mortgage-backed securities, by which it would profit if those securities declined in value, but did not disclose its selection of, or short position against, the assets it helped select. The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits.
Judge Rakoff’s questions include, but are not limited to, the following:
“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?”
Why is the $95 million proposed penalty less than one-fifth of the $535 million assessed” by the SEC last year against Goldman Sachs on charges related to a $2 billion CDO deal called Abacus 2007-AC1?
Is there “an overriding public interest in determining whether the SEC’s charges are true?”
Why is Citigroup’s penalty “to be paid in the large part by Citigroup and its shareholders” rather than the individuals who committed the wrongdoing?
“If the SEC was for the most part unable to identify such alleged offenders, why was this?”
Judges “are now questioning what’s been a longstanding and very cozy practice of Wall Street and the SEC hedging their bets with these agreements.”
Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.