The unproven allegations, U.S. District Court Judge Jed S. Rakoff said, “are no better than rumor or gossip.”
“Does not the SEC of all agencies have an interest in establishing what the truth is?” Rakoff asked.
It was the third case since the financial meltdown of 2008 in which Rakoff sharply questioned the value of enforcement actions brought by the Securities and Exchange Commission, which is responsible for policing Wall Street and protecting investors.
Citigroup is accused of misleading investors about a 2007 transaction tied to the deteriorating housing market in which the firm bet against its customers and made profits of $160 million while the customers lost more than $700 million.
At a time when protesters are occupying Wall Street and members of the public are calling for financial executives to be held accountable for the crisis their firms helped precipitate, Rakoff has argued that the SEC makes troubling compromises.
The SEC has countered that settling its civil suits without any admission of wrongdoing brings misconduct to light, conserves agency resources and enables the SEC staff to pursue other investigations. It allows the agency to repay victims some of their damages sooner rather than later, and it avoids the need for the regulators to actually win a case in court.
In a case involving State Street, two former employees of the firm fought the SEC and recently beat the agency in an administrative trial.
Rakoff’s grilling of the agency Wednesday extended to other standard SEC practices.
SEC settlements routinely include court orders prohibiting defendants from committing similar violations in the future and exposing them to potentially severe consequences if they do. However, the agency has refrained from enforcing those injunctions against repeat offenders.
Citigroup was subject to two injunctions that predated the current case, SEC chief litigation counsel Matthew T. Martens said.
Rakoff suggested that the injunctions are “just for show.”
The SEC lawyer said the agency takes past offenses into account when determining an appropriate penalty. Other SEC officials said after the hearing that past injunctions can be enforced only when the SEC catches a defendant in an ongoing violation.
The proposed settlement also calls for Citigroup to take remedial steps to reduce the risk of future violations; Rakoff asked if those were merely “window dressing.”
Getting a judge to approve SEC’s settlements was often a formality, but Wednesday’s hearing brought a slew of top SEC brass to the federal courtroom in Manhattan.