"But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, the Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances." With these words Judge Rakoff rejected the SEC's proposed settlement in its Citigroup market crisis case and set it for trial. SEC v. Citigroup Global Markets Inc., Case No. 11 Civ. 7387 (S.D.N.Y.).
The action against Citigroup is the Commission's latest market crisis case centered on conflicts of interest and deception tied to the sale of interests in a synthetic CDO linked to the subprime real estate market. According to Judge Rakoff, who was asked to approve the settlement (here), the underlying conduct is far worse than that in the action against Goldman Sachs. That case yielded a fraud injunction, a record penalty and an admission. The proposed deal with Citigroup, in contrast, is based on negligence and a far smaller penalty.
Judge Rakoff began his opinion by detailing the standards under which the Court is to review a proposed consent judgment from a regulator such as the SEC. The SEC and Judge Rakoff have been down this path before. This section of the opinion should be boiler plate. Not here. Instead, the Court accused the Commission of omitting a key concept, flip flopping and misstating the law in an apparent effort to usurp the role of the judiciary.
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