SEC appeals court rejection of Citigroup settlement

By Peter Schroeder - 12/15/11 05:38 PM ET

The Securities and Exchange Commission (SEC) is pushing back against a court decision overruling a settlement it previously reached with Citigroup for its actions during the financial crisis.

The Wall Street watchdog appealed the decision Thursday, as one of its top officials blasted it as wrongheaded and bad for investors.

In a lengthy statement issued Thursday, Robert Khuzami, SEC's head of enforcement, said a November ruling overturning the settlement was a "legal error" that is "at odds with decades of court decisions."

Judge Jed Rakoff of the U.S. District Court for the Southern District of New York determined that the SEC was wrong to settle a fraud investigation into Citigroup's mortgage-backed securities business without admitting to any wrongdoing. In addition, he said the $285 million settlement "shortchanged" defrauded investors, since they lost roughly $700 million. The SEC had charged that Citigroup had loaded an investment vehicle with risky mortgages, sold it off, and then bet against it without disclosing the move to the buyers.

But Khuzami argued that the SEC sought as much as it could in the settlement, and that the court's decision to force a trial could actually harm investors in the long run, since a settlement guarantees some remuneration without a lengthy and risky court trial.

"A settlement puts money back in the pockets of harmed investors without years of courtroom delay and without the twin risks of losing at trial or winning but recovering less than the settlement amount — risks that always exist no matter how strong the evidence is in a particular case," he said.

In fact, forcing the SEC to go to court more often would likely result in fewer cases overall, which means less money being returned to investors done wrong.

Rakoff blasted the SEC in his decision, accusing the agency of looking to quickly dispense with the matter, calling the settlement "neither fair, nor reasonable, nor adequate, nor in the public interest."

But Khuzami pointed out Thursday that the SEC is willing to take bad actors from the financial crisis to court when the situation calls for it.

The SEC has refused to settle with 40 of the 55 people charged for actions during the financial crisis, and 11 of the 26 entities. He added that in the latter case, the SEC could not litigate against eight of those entities because they were either bankrupt or no longer existed.