On Wednesday, the 2nd U.S. Circuit Court of Appeals in Manhattan
rescinded the decision of U.S. District Judge Jed Rakoff related to
) - U.S. Securities and Exchange Commission (SEC) settlement of
$285 million. The settlement was to compensate investors who were
misled by Citigroup with a housing market related collateralized
debt obligation (CDO).
The federal judge rejected the settlement in Nov 2011, citing that
it was not fair, reasonable or adequate and not in public interest.
The judge objected to the practice of settlement by the SEC, under
which the companies neither agree nor deny the charges made by the
defendants. The settlement, which involved a loss of over $700
million by investors, has been referred to as a "pocket change" by
As per Rakoff, such protective shields provided to banks by
regulators would further encourage them to indulge in such acts.
These unlawful activities by the banks have affected the total
economy to a large extent. Any wrong step in support of the banks
would prevent these facts from emerging in the interest of the
Notably, the SEC accused Citigroup of misleading investors while
selling a $1 billion fund in 2006 and 2007, which was invested in
mortgage-related securities. Citigroup was accused of not letting
investors know that it was betting against many of the assets.
Incidentally, Citigroup neither admitted nor denied the wrongdoing
that it had been accused of.
On the contrary, the SEC was not convinced of the judge's decision
and demanded more judicial power to take decisions while increasing
the agency's authority to levy a fine on the companies and
individuals. According to the SEC, the judge committed a legal
error by setting such a new standard, which in turn would deprive
investors of substantial, certain and immediate relief.
Therefore, the 2nd U.S. Circuit Court of Appeals gives a green
signal to the SEC for determining whether the settlement requires
admission of wrongdoings or not in such settlements. Moreover, such
a ruling will help regulators return money to aggrieved investors
even without admission of wrongdoings.
Post the financial crisis, the SEC ramped up its efforts to
regulate institutions and penalize them for wrongdoings and
misrepresentation of facts while selling their investment products.
Besides Citigroup, others that reached settlements or have been
penalized in the past include
Bank of America Corp.
Wells Fargo & Co.
The Goldman Sachs Group Inc.
We believe that while such settlements dent the company's
financials to some extent, they also reduce the litigation
overhang. Currently, Citigroup carries a Zacks Rank #3 (Hold).
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