A judge for the US District Court for the Southern District of New York [official website] on Friday ordered [text, PDF] the US Securities and Exchange Commission (SEC) [official website] and Citigroup [corporate website] to defend their recent settlement agreement [JURIST report]. The agreement concluded the dispute that charged Citigroup with having misled its investors about a $1 billion loan that defaulted. The result left investors to bear the burden while Citigroup reaped $160 million in profits from trading and fees. Judge Jed Rakoff directed both parties to answer nine questions pertaining to the $285 million settlement. One of Rakoff's principal issues is why the SEC imposed a $95 million penalty on Citigroup but imposed a $535 million penalty [PDF, settlement agreement] on Goldman Sachs in a July 2010 suit. The judge also found fault with the reasoning behind the settlement and asked the parties prepare to defend their reasoning:
How was the amount of the proposed judgment determined? In particular, what calculations went into the determination of the $95 million penalty? Why, for example, is the penalty in this case less than one-fifth of the $535 million penalty assessed in SEC v. Goldman Sachs & Co. Why should the Court impose a judgment in a case in which the S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?The next hearing is scheduled for November 9 when both sides will be required to answer the questions set out in the order.
This is not the first time that Rakoff has questioned settlements between the SEC and major financial corporations. In February 2010 he accepted a settlement [agreement; JURIST report] agreement between the SEC and Bank of America after twice rejecting it [JURIST report; JURIST report] as unfair to investors. This is also not the first time the SEC has taken issue with Citigroup's dealings with investors. In July 2010 the two sides reached [JURIST report] a settlement in regards to the SEC's claim that Citigroup misled investors about it's exposure to sub-prime mortgage-related assets. That agreement penalized the company $75 million. It was also rejected in August 2010 when a federal judge demanded to know how it was reached and why the investors were forced to bear the majority of the cost, but not the majority of the executives. The settlement was approved [Reuters report] October 2010.