Court: Judge wrong to toss SEC-Citigroup settlement

A U.S. appeals court said Wednesday that a judge was wrong to throw out a settlement between the Securities and Exchange Commission and Citigroup, saying he failed to show proper “deference” to the regulator.

The U.S. Court of Appeals for the Second Circuit determined that the court that tossed the settlement “abused its discretion by applying an incorrect legal standard.”

The decision undercuts a highly controversial ruling from Judge Jed Rakoff that ignited a debate about whether Washington was pushing Wall Street hard enough to own up to wrongdoing after the financial crisis.

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In 2011, Rakoff tossed out a proposed $285 million settlement the SEC struck with Citigroup for its role in structuring and selling risky securities loaded with subprime mortgages.

Rakoff blasted the SEC for the settlement, which did not require the bank to admit or deny any wrongdoing. He said the dollar amount “shortchanged” investors wronged by the bank, and the deal was “neither fair, nor reasonable, nor adequate, nor in the public interest.”

“By the SEC’s own account, Citigroup is a recidivist, and yet, in terms of deterrence, the $95 million civil penalty that the consent judgment proposes is pocket change to any entity as large as Citigroup,” Rakoff writes.

The decision upended a long-standing tradition of courts generally rubber-stamping settlements that regulators strike with those they oversee; the SEC argued it was a poor use of limited resources to push banks to either admit guilt or fight it out in court.

Rakoff’s became a focal point in the debate over whether the financial sector has been appropriately held accountable for its role in the financial crisis.

The contentious decision attracted the attention of lawmakers in Washington, who began pushing for a tougher stance from regulators. When she took over the agency, Chairwoman Mary Jo White said she would revisit the policy and push for culpability in serious civil cases.

Tuesday’s ruling said that an admission of liability should not be a condition for a judge signing off on a settlement. Rather, the court said the decision to require an admission of wrongdoing “rests squarely” with the SEC.