Citigroup Inc. 's ( C ) settlement deal with the US Securities and Exchange Commission (SEC) is getting delayed. The SEC has won a federal appeals court approval of an emergency ruling, which brought a temporary suspension to the proceedings. The SEC has appealed against a federal judge's decision to reject its $285 million settlement of securities fraud charges with Citi.
The case will be put on hold until at least January 17, 2012. This delay would facilitate the appeals court to decide whether to approve an expedited hearing on the appeal. The court's judgment will be vital here as future settlement cases involving SEC would bear the brunt because this judgment will be considered as a precedent.
Notably, the SEC has alleged Citi of misleading investors while selling a $1 billion fund in 2006 and 2007, which was invested in mortgage-related securities. Citi was accused of not letting investors know that it was betting against many of the assets. Incidentally, Citi neither admitted nor denied the wrongdoing that it had been accused of.
The federal judge rejected the settlement in November, 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 to 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 the judge.
On the other hand, 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.
Post financial crisis, SEC has ramped up its efforts to regulate institutions and penalize them for wrongdoings and misrepresentation of facts while selling their investment products. Besides Citi, others that have also reached settlements or have been penalized in the past include Bank of America Corp. ( BAC ), Wells Fargo & Co. ( WFC ) and Goldman Sachs Group Inc. ( GS ).
We believe that while such settlements dent the company's financials to some extent, they also reduce the litigation overhang.
Citi currently retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.