Another judge blasts the SEC

Cite this Article
Larry Ribstein, Another judge blasts the SEC, Truth on the Market (August 17, 2010),

When the SEC announced its settlement with Citigroup a couple of weeks ago, I said:

The SEC has reached another peculiar settlement, this time $75 million from Citigroup, plus fines against executives. As with the Goldman settlement, Citigroup didn’t admit fraud, or even, as in that case, a mistake. Citigroup was accused of misleading investors about its exposure to subprime. The bank knew it was exposed to the housing market, but thought its senior tranches were safe. The misrepresentation concerned $37 billion and basically the life or death of the company. The fine was $75 million, which either ludicrously fails to match the misrepresentation, or suggests Citigroup didn’t really do anything wrong. If it didn’t do anything wrong, then why a fine? * * *And then there’s the problem that whatever was going on, Citigroup, or more accurately its shareholders, were getting hit for mere negligence of its executives * * *

I noted that the SEC settlement essentially boils down to questioning executives’ business judgment, and that it smacked of a politically motivated move to show the SEC was doing something about the financial meltdown.

The SEC defended the settlement by citing Judge Rakoff’s approval of the earlier SEC BOA settlement. But it forgot to mention that Judge Rakoff had thrown out the first version of that settlement as “half-baked justice” and “inadequate and misguided.”

Now the court reviewing the Citibank settlement is in the process of pulling a BOA. Here’s the WSJ article:

A federal judge refused to approve the Securities and Exchange Commission’s $75 million settlement with Citigroup Inc. over the bank’s disclosure of subprime-mortgage problems, saying she is “baffled” by the proposed pact. * * * The judge, striking a frustrated tone, fired several questions at the SEC, among them why it pursued only two individuals in the case and why Citigroup shareholders should have to pay for the alleged sins of bank executives. * * * “You’ve focused on two individuals and I can’t for the life of me figure out why,” the judge told the SEC lawyers. * * * The judge * * * suggested the [Citigroup executives] “could only be culpable if they knew” the size of the exposure.

The judge had some of the same problems I did. If there’s fraud, the settlement is inadequate. If none, why the fine? And in any event why should the shareholders be left holding the bag?

What it boils down to is that the courts are getting tired of playing political charades with the SEC.