A federal judge cast doubt Thursday on the fairness of a $285 million settlement that Citigroup reached with the Securities and Exchange Commission, saying lawyers need to explain how the deal is sufficient to make such serious securities fraud allegations go away.
U.S. District Judge Jed Rakoff in Manhattan scheduled a Nov. 9 hearing on the deal announced earlier this month, questioning why he should approve the deal when Citigroup Inc. neither admits nor denies wrongdoing.
"Given the SEC's statutory mandate to ensure transparency in the financial market place, is there an overriding public interest in determining whether the SEC's charges are true?" the judge asked lawyers in a written order. "Is the interest even stronger when there is no parallel criminal case?"
Citigroup spokeswoman Danielle Romero-Apsilos declined to comment Thursday.
The SEC brought civil fraud charges against Citigroup earlier this month, saying that it misled buyers of a complex mortgage investment just as the housing market was starting to collapse. The SEC said the Wall Street bank bet against the investment in 2007 and made $160 million in fees and profits while investors lost millions.
The $285 million settlement was to include the fees and profit Citigroup earned, plus $30 million in interest and a $95 million penalty. The SEC said the money would be returned to investors.
Rakoff asked why the penalty would be paid in large part by Citigroup and its shareholders rather than culpable individual offenders.
"How can a securities fraud of this nature and magnitude be the result simply of negligence?" he asked.
The judge also questioned how the $95 million penalty was determined and why it was less than one-fifth the amount imposed last year in a case against Goldman Sachs Group Inc.
"What reason is there to believe this proposed penalty will have a meaningful deterrent effect?" he asked.
Citigroup received $45 billion as part of the $700 billion government bailout at the height of the financial crisis in 2008. Regulators at the time worried that Citigroup was on the brink of failure.
The judge also questioned how the SEC would ensure compliance with the terms of the deal. He asked lawyers to describe how many contempt proceedings against large financial entities the SEC has brought in the last decade related to prior consent judgments.