The SEC had accused Citigroup of misleading investors about an investment tied to the deteriorating housing market.
The sharply worded order adds to a growing body of criticism from Rakoff and others that the SEC can be a toothless enforcer. In past cases, the judge has accused the SEC of letting executives off the hook, accepting a paltry fine and leaving the truth in doubt by allowing companies to settle without admitting or denying wrongdoing. Other critics have said that the agency is too close to the industry it oversees.
In a recent report on a different case involving Citigroup, the SEC’s inspector general revealed that the firm had hired a former boss of the top SEC enforcement official to participate in its legal defense. The company ultimately succeeded in defusing potential fraud charges against two executives.
Monday’s order comes at a time when street protesters are complaining that the government has not taken Wall Street to task for its part in the financial crisis.
Rakoff, who previously faulted the SEC’s handling of a case against Bank of America, criticized the SEC’s decision to charge Citigroup with negligence instead of knowing or intentional fraud. The Manhattan judge said that allegations leveled by the SEC seemed to reflect the more serious offense.
Rakoff also slammed the SEC for following its standard practice of allowing defendants to settle charges without admitting or denying wrongdoing.
Some “apologists” may favor “suppressing or obscuring the truth,” Rakoff wrote. “But the S.E.C., of all agencies, has a duty . . . to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”
The court “concludes, regretfully, that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest,” he wrote.
Citigroup had agreed to pay $285 million to settle allegations that it misled investors while marketing a complex investment linked to subprime loans in early 2007. The bank was actually wagering against its customers, betting that the investment would lose money, the SEC said.
Citigroup made $160 million in profit on the deal, and investors lost more than $700 million, the SEC alleged.
In a statement, SEC enforcement director Robert Khuzami said that the agency will review the court’s ruling “and take those steps that best serve the interests of investors.” Khuzami defended the deal that the agency had negotiated with Citigroup.