In the Courts

On Nov. 28, 2011, Judge Jed S. Rakoff of the Southern District of New York issued an opinion in which he refused to approve a settlement between the U.S. Securities and Exchange Commission (“SEC”) and Citigroup Global Markets, Inc. (“Citigroup”) wherein Citigroup would not be required to admit or deny the underlying allegations. The opinion, U.S. SEC v. Citigroup Global Markets Inc., 11 Civ. 738, 2011 WL 5903733 (S.D.N.Y. Nov. 28, 2011), has received much attention as it may herald a sea change in SEC settlements, which historically have not required such admissions.

The case is one of several that are working their way through to SEC settlements in which large banks are charged with fraud in connection with the marketing and sale of complex financial products referencing residential mortgage-backed securities. These types of securities are frequently cited as at least a partial cause of the global financial crisis that began in 2007. In the matter before Judge Rakoff, the SEC alleges that Citigroup created a billion-dollar collateralized debt obligation (“CDO”) ' a fund consisting of asset-backed securities such as mortgages and auto loans ' that it marketed to investors without disclosing that the fund included assets which the bank believed were unlikely to be profitable. Id. at *1. Citigroup allegedly misrepresented to investors that the fund's assets had been selected by an independent investment advisor despite the fact that Citigroup had exercised substantial influence over the selection process and had arranged to include a large number of assets that the bank had actually bet against by taking a short position in a transaction know as “credit default swap.” Id. According to the SEC, Citigroup made approximately $160 million as a result of this transaction, while investors lost over $700 million. Id.