Magazine article American Banker

Citi-SEC Deal to Face 'Judge Dread' Hurdle

Magazine article American Banker

Citi-SEC Deal to Face 'Judge Dread' Hurdle

Article excerpt

Byline: Jeff Horwitz

The odds that Citigroup Inc.'s $285 million securities settlement with the Securities and Exchange Commission would avoid the courtroom of Judge Jed Rakoff were 97%.

Citi's luck was not good.

Rakoff's nine pointed questions to Citi and the SEC about their deal a and his rejection of an SEC settlement with Bank of America Corp. over covert Merrill Lynch bonus payments a have spawned a string of news articles calling the jurist, 68, "feisty," a "populist" and "Judge Dread."

Fireworks appear inevitable at a fairness hearing scheduled for Wednesday in Rakoff's courtroom in U.S. District Court for the Southern District of New York. But the judge's career doesn't suggest inherent hostility toward the SEC or large banks. He's less a vigilante than he is uncomfortable with disposing of major securities cases with settlements that fail to resolve the legal issues at hand.

The SEC's complaint against Citi is a perfect example. News reports characterized the suit as alleging that Citi officials built collateralized debt obligations designed to fail and enlisted a CDO manager to misrepresent them to buyers. That's not quite right.

Instead, the SEC merely alludes to a massive fraud while limiting itself to alleging that a low-level Citi employee "neglected" to put wording into disclosure documents that described Citi's role in the CDO deals. Under the pending settlement the SEC doesn't even prove that. Rather, its deal requires Citi to accept punishment without admitting any guilt a precisely the sort of pact Judge Rakoff blasted in the Bank of America case. …

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