The Securities and Exchange Commission (SEC) is fast making itself an enemy of Judge Jed Rakoff.

 

The SEC previously filed a settlement with Rakoff to resolve a billion-dollar securities fraud case involving Citigroup—which the judge rejected because he said the $285 million award was inadequate and the bank did not have to admit wrongdoing. Rakoff claims, with much justification, that such a lame punishment allows Citigroup and others guilty of fraud to look at settlements as nothing more than “a cost of doing business.”

 

Rakoff then ordered the SEC and Citigroup to prepare for a trial to start in July.

 

But the federal agency, headed by Mary Schapiro, decided instead to go around the judge and ask the Second Circuit Court of Appeals to stay Rakoff’s ruling, which it did without him finding out until it was too late.

 

Rakoff issued a blistering order in response, accusing the SEC of misleading the appeals court and leaving him in the dark when it made its emergency request.

 

The case has its origins in Citigroup selling $1 billion in residential mortgage-backed collateralized debt obligations (CDOs) to investors while lying to them about the quality of the investment. Citigroup also bet against its own CDOs, earning $160 million in profit. Citigroup customers, meanwhile, lost $700 million from the deal.

-Noel Brinkerhoff, David Wallechinsky

 

Judge Calls Foul on SEC in Citigroup Case (by Adam Klasfeld, Courthouse News Service)

Federal Judge Accuses SEC of Misleading Court (by David S. Hilzenrath, Washington Post)

Judge Mocks SEC for Going Soft on Citigroup’s Conning of Investors (by Noel Brinkerhoff, AllGov)