Appeals court revives Citigroup-SEC accord over risky mortgage-backed securities

An appeals court has overturned a judge's refusal to approve the accord between Citigroup Inc and the Securities and Exchange Commission to settle claims of investor fraud.

In 2011, US District Judge Jed Rakoff decided to not approve the settlement between the two parties, which would dismiss the charges against the bank for misleading investors in a billion-dollar financial product linked to risky mortgages. The investment reported cost the participating investors over $600 million, Bloomberg said.

According to the SEC, Citigroup had packaged collateralized debt obligations into securities in 2007 for sale without disclosing to investors that it had a hand in picking around half of the underlying assets. Moreover, SEC said Citigroup had then bet against the securities, taking a short position as it predicted that the securities would decline in value.

Rakoff, who also criticized the financial agency's practice of not requiring the accused to admit wrongdoing in settlements, reasoned that both parties failed to provide him any admitted or proven facts that he could use to gauge the fairness of the deal. The SEC since then had been defending the practice and claimed that it encourages settlements and allows defendants to avoid admitting wrongdoing in public that could be used in private litigation.

But today, the US Court of Appeals in New York had sided with the SEC, and affirmed the regulator's wide purview to tailor its settlements as it sees fit. The three-judge panel has returned the case to Rakoff and ordered him to review the case again.

"It is an abuse of discretion to require, as the district court did here, that the SEC establish the ‘truth' of the allegations against a settling party," the appeals court stressed.

Bloomberg said that although the case did not turn on it, the appeals court ruling casts doubt on the issue of judges requiring the accused to admit wrongdoing in a federal agency settlement

Tags

US Securities and Exchange Commission, Citigroup Inc, mortgage-backed securities fraud, securities fraud settlements

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