SEC SETTLEMENT WITH CITI? NOT SO FAST

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EDITOR’S NOTE: The Justice Department and Judge Rakoff have something in common: they don’t like “settlements” that amount to sweetheart deals where the defendant neither admits nor denies wrongdoing. He believes that this obscures the truth and makes it all the more difficult for the public and future perpetrators to know what is going on, and what they can get away with.

It looks to me that the Citi settlement is just such a sweetheart deal that the SEC is using for PR. These banks stole trillions. They are getting away with a small fee that is fraction of one percent of what they stole. The Citi settlement should be scuttled — unless they admit wrongdoing. They sold bonds to investors who never would have advanced a dime if they had known that Citi was betting against the bonds at the same time they were selling them. “Trading profits” is a phrase used by Wall Street to cover up the fact that they essentially defrauded, stole and fabricated information and distributions that should have gone to investors and been credited to borrowers when the obligation was reduced.

But the real question is why was Citi betting against the bonds? The only credible answer is that they knew they had the power to make them fail and the failure of the bonds would allow them to set up a monumental fraudulent foreclosure scheme where Citi, instead of the investors received the bounty.

All they needed was a small percentage of “mortgage loans” (I obviously think that they were neither loans nor mortgages, even thought they were so titled) to “default” — which in the world of securitization means that if the borrower didn’t make a payment, even if the payment was not due, they would declare a default and put the property into foreclosure. The accounting was so convoluted, that even today most homeowners do not realize that they are probably sitting on property that has more equity than when they did the loan deal — because it was paid off without them knowing it.

October 20, 2011, 8:58 pm

Citigroup Deal to Go to Judge Critical of S.E.C. Practices

By PETER LATTMAN
Justin Maxon/The New York TimesJudge Jed S. Rakoff has taken the S.E.C. to task for resolving cases without making defendants admit wrongdoing.

It is boilerplate language found in nearly every settlement with the Securities and Exchange Commission: A company resolves its case “without admitting or denying” wrongdoing.

There it was again in the S.E.C.’s announcement on Wednesday that Citigroup had agreed to pay $285 million to settle a civil complaint that it had defrauded investors in a mortgage securities deal. The bank did so “without admitting or denying” the government’s accusations.

But the S.E.C.’s longstanding policy of using this phrase in its settlements is likely to come under scrutiny by the federal judge who must approve the Citigroup settlement — and it could, legal experts say, cause the deal to come undone.

That is because the judge presiding over the S.E.C.’s action against Citigroup is Judge Jed S. Rakoff of Federal District Court in Manhattan, a jurist whom many consider the agency’s bête noire.

“Given his recent jurisprudence, if anyone’s going to rattle the S.E.C.’s cage on this issue, it’s Judge Rakoff,” said Michael Koehler, a professor of business law at Butler University who has written about the S.E.C.’s settlement practices.

Judge Rakoff is known for a scathing ruling in September 2009, when he rejected a proposed $33 million settlement between the agency and Bank of America over its acquisition of Merrill Lynch. The judge called it a sweetheart deal for the bank that had been done “at the expense, not only of the shareholders, but also of the truth.” (He later grudgingly approved a $150 million settlement.)

More broadly, Judge Rakoff has sharply criticized the agency’s practice of resolving cases without forcing the defendant to admit any wrongdoing. In a little-noticed ruling in March, he raised the specter of scuttling the next S.E.C. settlement in his courtroom that included such language.

Judge Rakoff said the use of the “without admitting or denying wrongdoing” language created “a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C.”

By using the boilerplate phrase, ”only one thing is left certain: the public will never know whether the S.E.C.’s charges are true, at least not in a way that they can take as established by these proceedings,” he wrote.

Judge Rakoff’s disapproval of the agency’s settlement practices came in an accounting fraud case against the technology company Vitesse Semiconductor and two of its former executives.

He ultimately approved the Vitesse settlement, finding it fair and reasonable, but not before criticizing the commission on a number of fronts. He chafed at the S.E.C.’s lack of explanation for why he should approve the settlement and described the agency as treating the court as a “rubber stamp.”

But much of his opinion was aimed at the “neither confirm nor deny the allegations” phrase, which he called “troubling.”

Judge Rakoff looked back at the history of the practice and found that the S.E.C. had permitted defendants to settle without admitting wrongdoing because that made obtaining settlements much easier. And defendants preferred it, he noted, because if they were forced to acknowledge their bad behavior, private plaintiffs would pile on with civil actions seeking monetary damages far greater than anything regulators were likely to impose. Then, in the 1970s, the S.E.C. began prohibiting defendants who settled from publicly denying the accusations. That was intended to prevent them from engaging in public relations campaigns to contend that they had settled only to avoid protracted litigation.

Those historical reasons were met with scorn by the judge. “The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them, either,” the judge wrote.

He suggested that permitting the defendant to neither admit nor deny the misconduct was indefensible.

“An agency of the United States is saying, in effect, ‘Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it,’ ” he said.

Such strong language is the norm for Judge Rakoff, one of the more colorful judges on the federal bench in Manhattan. Judge Rakoff, 68, is a former federal prosecutor who also spent years as a criminal defense lawyer before he was named to the bench. He is currently presiding over a number of major cases, including several of the insider trading prosecutions and a dispute between the trustee for the victims of Bernard L. Madoff’s fraud and the owners of the New York Mets baseball team.

Judge Rakoff is not alone in his discomfort over the “neither confirm nor deny” language. The Justice Department has long prohibited defendants, except in the most unusual circumstances, from pleading guilty to a crime without admitting or denying the charges.

William F. Galvin, the top financial regulator in Massachusetts, has also been a critic of the “neither admit nor deny” language and has forced companies that settle to admit they engaged in unlawful conduct.

And at least one top agency official has expressed concern. In a speech earlier this year, Luis A. Aguilar, an S.E.C. commissioner, worried that defendants who settled with the agency were issuing press releases after settlements that amounted to “revisionist history.” If this continued, he said, “it may be worth revisiting the commission’s practice.”

7 Responses

  1. Citi is trying to get my home after making undisclosed profits on my loan and possibly having insurance to make my payments. Other homeowners and I are going to gets its due with our homes or without our home because elephants and I (WE) never forget. So settle now or later. You are going to ask for my signature to straighten my title chain out. You are not getting anything without paying now or later. You are criminals. Judges who keep going along with you will pay . Either with their guilt ridden suicides, as in Racine, WI. or the rest of your miserable lives. Just try to take your money stolen from us , with you. I will piss on your graves for what you have done to We , the People..

    Raise hell when you can, people,
    keep up the fight!
    Stan
    Racine, WI.

  2. Bailing out who???? Not the victims.

  3. Real joke here is that the EU losses are going to hit citi and these others and any charges such as this settlement simply add to the bailout $$ they will receive to recapitalize.

    There is no monetary charge that is meanigful to rein in or punish a TBTF INSTITUTION—–either the heads go to jail or the actions kick them out of TBTF–ie breakup is part of the punishment—-or as the post says its just “PR”

    I agree with the post–its just PR–ill bet they do not even write a check–just hold it as an offset to the bailout that is already being fitted out for them—-the fundamental issue is that you simply cannot punish a business entity on one day and the next come in and say that same operation is TBTF

    its crazy that Hank Paulsen actually got away with this charade which is nothing more than a cover for anti-competive accretion of monopoly power-they are TBTF so Hanks answer was well”lets merge more smaller operations into them so then they are noly TBTF but also too big to regulate—which got him in his sweet spot

    its all a farce as long as Goldman –bankfein and paulsen are able to get away with pushing greece to overleverage against the rules and then bring the whole world to the brink again

    What next——who else did the TBTFs induce to borrow so much that the world shakes–Singapore?
    Honk Kong?
    China?
    Argentina and Brazil?

    Who is next—and Blankfein lays low
    reviewing whicj islands in greece are the best buy? at least for a winter home–

  4. Settlement was over CDOs, squared CDOs, and synthetic CDOs (collection of credit default swaps) — all FAR removed from mortgage loans. Rather, derivatives – derived from squared derivatives – derived from securities — derived from certificates — derived from mortgage loans — derived from collection rights.

    Not even close to a creditor to borrower — and all RISKY despite any credit rating that claimed to “reduce” risk by the layers of “credit enhancement.”

    What about the real victims????

  5. I think the settlement is outrageous in the form it is in. The caveat should be: filing satisfactions of deeds to the homeowners, from the investors who originally held the note and now that it has been satisfied, the house is free and clear. The servicer has no right of legal trespass or ownership.

    As for the banks that foreclosed on other of these homes, have now made the investors whole, so now the former homeowners should be made whole too. The ones that have been foreclosed on: give them fair market value for the stolen property.

  6. If the judge approved those cases mentioned despite his “scathing” language, then his actions speak louder than his words, don’t they?

    Another paper tiger, methinks.

  7. Every deal that involved my loan had Citigroup Global Markets involved. WFHET 05-2: Citigroup Global Markets as Securities Underwriter; Salisbury Int’l Investments Ltd, Cayman Islands.: arranged by Citigroup Global Markets (synthetic CDO). Goldman Sachs’ LOCHSONG (CDO) has Chase and Deutsche. Citi is in there somewhere, can’t find it right now. Hang ’em high!

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