The government is telling a federal judge that $285 million is a fair penalty for Citigroup Inc. to pay to settle charges that it misled buyers of a complex mortgage investment ahead of the housing bust.
U.S. District Judge Jed Rakoff in Manhattan has blocked the settlement that the Securities and Exchange Commission reached with Citigroup last month. He implied that the settlement was insufficient given the charges and asked the government to justify the amount.
The SEC said Monday that $285 million is close to what it would have won in a trial. The sum came after an extensive investigation and will go to investors harmed by Citigroup's conduct, the SEC said.
The SEC said the bank bet against the investment in 2007 and made $160 million, while investors lost millions.
"The court should approve the proposed (settlement) as fair, adequate and reasonable," the SEC said in its filing.
In the settlement, Citigroup neither admitted nor denied the SEC's allegations.
The $285 million was the largest amount to be paid by a Wall Street firm accused of misleading investors before the financial crisis since Goldman Sachs & Co. agreed to pay $550 million to settle similar charges last year. JPMorgan Chase & Co. resolved similar charges in June and paid $153.6 million.
All the cases have involved complex investments called collateralized debt obligations. Those are securities that are backed by pools of other assets, such as mortgages.
Citigroup's proposed payment includes the fees and profits it earned, plus $30 million in interest and a $95 million penalty.
Rakoff had asked the SEC why that penalty was less than one-fifth of the $535 million penalty imposed on Goldman Sachs in the similar case.
The SEC said it charged Goldman Sachs with securities law violations that involved intent to defraud, while the alleged fraud by Citigroup resulted from negligence on the part of the bank. That warrants a smaller penalty than intentional fraud, the agency said.