Citigroup (NYSE:C) tried to pay off regulators with a $285 million settlement to squash accusations it duped investors into buying now-infamous subprime mortgage debt. But thanks to one Manhattan judge, that hush money won’t be paid and Citi might now face a day in court.
That, of course, is the hyperbolic description of what U.S. District Judge Jed Rakoff did Monday with his decision to reject a settlement between the Securities and Exchange Commission and Citigroup. The losses to subprime mortgage investors who relied on Citi total about $700 million, more than double the proposed fine. Oh yeah, and Citigroup does about $110 billion in annual revenue — yes, billion, with a “B.” Kind of makes $285 million seem like a parking ticket, doesn’t it?
But that wasn’t really what riled Judge Rakoff — at its core, this seemed to be a case where banks could just do whatever they want and pay a nominal fine to avoid any real penalties.
Rakoff wasn’t having that. Here’s what he wrote in his ruling:
“Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.”
In layman’s terms, Rakoff rejected a fine that nobody other than the SEC and Citi thought was fair — and demanded that a public agency and the nation’s third-largest lender not be allowed to quietly settle things out of court without the rest of America actually knowing what the wrongdoing was in full detail.
This isn’t a two-party dispute over alimony, after all. This is about the toxic debt instruments at the core of a financial crisis.
Rakoff goes on to say in his ruling:
“In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.”
The case of Citigroup and its subprime mortgage practices is headed to trial on July 16, 2012, unless another more favorable settlement hits Rakoff’s desk. The judge has publicly criticized the SEC’s practice of letting financial institutions such as Citigroup settle without admitting or denying liability, and without fully airing its dirty laundry for the inspection of investors and the borrowing public.
It is an interesting coincidence that the fine comes out on the day that Rep. Barney Frank, D-Mass., announced today that he will not seek reelection in 2012. Frank, chairman of the House Financial Services Committee and author of the Wall Street reforms that were signed into law in 2010, is bowing out in part because his district was redrawn and he faces a tough fight at the ballot box. But it’s worth noting that many of the reforms he proposed were either written out of the bill or face significant threats from other legislators — including the Bureau of Consumer Financial Protection and the so-called “Volker Rule” meant to curb investment banking and risk-taking at financial stocks.
For those wondering who now would advocate the interests of taxpayers and regular consumers on Wall Street, Judge Jed Rakoff has given them something to rally behind.
But it’s going to take a lot more than this to prevent companies like Citigroup from manhandling small-time investors for their own personal gain. Only time will tell whether Monday’s move to block the SEC settlement will really matter. After all, no amount of fines after the fact can fix the economy. Deterring crooked behavior in the down the road is far more important — and hopefully Rakoff’s refusal to rubber-stamp this SEC settlement will make banks think twice in the future.