Citi-SEC Settlement Gets Messy - Analyst Blog

Citigroup Inc. 's ( C ) settlement deal with the US Securities and Exchange Commission (SEC) is getting messy. The SEC is appealing against a federal judge's decision to reject its $285 million settlement of securities fraud charges with Citi.

The SEC has alleged Citi of misleading investors while selling a $1 billion fund in 2006 and 2007 that 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 wrongdoing.

The federal judge had 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, with companies showing no admission or denial to the charges by the defendants. The settlement, which involved 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.

The circuit court's judgment will be vital here as future settlement cases involving SEC would bear the brunt as this judgment will be set as a precedent.

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.

BANK OF AMER CP ( BAC ): Free Stock Analysis Report

CITIGROUP INC ( C ): Free Stock Analysis Report

GOLDMAN SACHS ( GS ): Free Stock Analysis Report

WELLS FARGO-NEW ( WFC ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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