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Citigroup and the SEC came to a $285 million settlement over a claim that the bank mislead investors in a $1 billion collateralized debt obligation linked to subprime mortgages. But when the agreement got back to Judge Jed Rakoff, he ruled that the settlement was too low, Bloomberg reports.It’s not because investors lost $700 million. Judge Rakoff’s issue comes from an SEC policy dating back to the 1970s. The regulator allows entities to settle without confirming or denying that they are guilty of SEC charges.
Judge Rakoff has never been a fan of the policy, so he thinks that if Citigroup wants to maintain that ambiguity, they’re going to have to pay up. He can’t force the SEC and Citigroup to go to trial, but he can reject a settlement that he deems too low.
The practice hasn’t gone out of style because it works for the SEC and for the defendant. The SEC doesn’t have to go through the embarrassment of potentially losing a trial, and the defendant doesn’t have to deal with the public relations hassle of admitting guilt.
“Rakoff seems to be getting more and more upset with the SEC when these cases come before him,” said James Kwak, a fellow at the Harvard Law School corporate governance program. He is “trying to find a way to put his foot down, to put a stop to this.”
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