The public must learn the truth about the alleged fraud and conflicts of interest at the heart of the credit crisis, a Manhattan judge declared last night, vowing to put Citigroup in the dock over a $1 billion mortgage deal that went sour.
In a searing judgment rejecting a proposed settlement between the bank and Wall Street's regulator, the Securities and Exchange Commission, Judge Jed Rakoff ruled the allegations of negligence must instead be decided at a trial next year. "In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth," Judge Rakoff ruled. "The SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges."
The SEC accused Citigroup of misleading investors in a $1bn mortgage-backed vehicle called a collateralised debt obligation (CDO) as the US housing market was beginning to collapse in 2007, by not telling them it was also betting against the transaction. The CDO, "Class V Funding III", was typical of the derivatives at the heart of the credit crisis and slumped in value, costing its investors $700m.
Under the settlement, the bank neither accepted nor denied the charge of negligence. Such an arrangement is common to SEC settlements over alleged wrongdoing in the financial sector, but they have attracted criticism for being too easy on banks. It said last night it still believed the settlement was fair and in the public interest.
Citigroup was required to give up $160m of alleged ill-gotten profit, plus $30m of interest, and pay a $95m fine for the alleged negligence. The fine is a fraction of that paid by Goldman Sachs last year in a $550m settlement over a different CDO. Goldman neither admitted nor denied the central fraud charges in that case, although it did admit to providing incomplete information to investors.
One Citigroup employee, Brian Stoker, has also been charged with negligence by the SEC. He is contesting those charges.