Judge Rakoff Puts SEC and Citigroup in Hot Seat Over Their $285 Million Deal

By JEAN EAGLESHAM And NICK TIMIRAOS

It won't be fun for Citigroup Inc. and the Securities and Exchange Commission to defend their proposed $285 million settlement at a Wednesday court hearing ordered by a very skeptical federal judge.

U.S. District Judge Jed S. Rakoff could kill the deal if he doesn't like what he hears.

SEC officials consider nine factors, including losses suffered by investors as a result of the alleged wrongdoing. The agency also weighs how much the company benefited from the behavior and whether investors will be hurt by a penalty.

"I wouldn't say it's more art than science," said Daniel Richman, a law professor at Columbia University. "It's just a million different sciences."

In the Citigroup case, the proposed $285 million settlement for a $1 billion mortgage-bond deal came after 30 million pages of evidence, according to the firm's court filing—or more than double the distance from New York to Los Angeles if the pages were laid end to end. The settlement includes the return of allegedly illicit profits of $160 million and a penalty of $95 million, plus $30 million in interest.

Among nine sternly worded questions in an order last month, Judge Rakoff asked why Citigroup's penalty is less than one-fifth the penalty paid by Goldman Sachs Group Inc. in its $550 million settlement with the SEC last year over a different mortgage-bond deal.

Goldman officials complained to the SEC last year that they were stunned by the agency's fraud lawsuit in April 2010 over the securities firm's Abacus 2007-AC1 deal.

An SEC spokesman declined to comment. In a report last year by the agency's inspector general, the SEC said there were "multiple opportunities for Goldman to pursue settlement." Goldman declined to comment.

A Citigroup spokeswoman declined to comment beyond a court filing Monday.

Goldman and Citigroup agreed to their settlements without admitting or denying wrongdoing, boilerplate language that Judge Rakoff also is forcing the SEC and Citigroup to defend at Wednesday's court hearing.

In a court filing, the SEC said its industrywide investigation into mortgage-bond deals left agency officials "well-positioned to make comparative judgments regarding the relative culpability of the entities and individuals involved."

Regardless of Judge Rakoff's ruling on the Citigroup deal, the SEC is likely to face more questions in the future about how to punish alleged wrongdoing during the financial crisis.

For example, SEC officials are nearing the conclusion of an enforcement action related to Fannie Mae and Freddie Mac that is expected to include no financial penalty, according to people familiar with the matter. The settlement could come within weeks, these people said.

The SEC has been investigating whether the mortgage giants adequately disclosed their exposure to risky loans as the credit crunch worsened in 2008, people familiar with the matter said.

Fannie Mae and Freddie Mac are likely to avoid a financial hit because they are taxpayer-owned institutions under the custodianship of a government regulator, these people said.

SEC officials see no point in a penalty that essentially would move money from one part of the U.S. government to another. Instead, the SEC is negotiating with the companies an agreed-upon statement of what happened, according to people familiar with the situation. Fannie Mae and Freddie Mac declined to comment. A spokesman for the SEC declined to comment.