NEW YORK—A New York judge on Wednesday continued to question whether a proposed $285 million settlement that Citigroup reached with the Securities and Exchange Commission is fair to investors burned in the housing bust.
U.S. District Judge Jed Rakoff grilled lawyers from both sides at a hearing in federal court in Manhattan before again putting off a decision on a request to approve the deal.
Rakoff questioned whether a settlement that both imposes penalties on Citigroup and allows it to deny allegations it misled investors on a complex mortgage investment "makes any sense."
The SEC has accused the bank of betting against the investment in 2007 and making $160 million, while investors lost millions.
The judge suggested the provisions freeing Citigroup of any admission of liability could undermine private claims by investors he said stand to recover only $95 million in penalties on total losses of $700 million.
"The net effect of this is that you're only returning a small portion of what investors lost," Rakoff told SEC lawyer Matthew Martens.
Martens insisted that Citigroup has "not denied the allegations." The SEC also said that investors will receive the full $285 million, which includes the disputed profits plus interest.
Asked for his take, Citigroup lawyer Brad Karp told the judge, "We do not admit the allegations. But if it's a consolation, we do not deny them."
In a filing earlier this week, the SEC told Rakoff that the $285 million is close to what it would have won at trial, urging the court to "approve the proposed (settlement) as fair, adequate and reasonable.
The $285 million was the largest amount to be paid by a Wall Street firm accused of misleading investors before the financial crisis since Goldman Sachs & Co. agreed to pay $550 million to settle similar charges last year. JPMorgan Chase & Co. resolved similar charges in June and paid $153.6 million.
All the cases have involved complex investments called collateralized debt obligations. Those are securities that are backed by pools of other assets, such as mortgages.
Rakoff had previously asked the SEC why that penalty was less than one-fifth of the penalty imposed on Goldman Sachs.
The SEC said it charged Goldman Sachs with securities law violations that involved intent to defraud, while the alleged fraud by Citigroup resulted from negligence on the part of the bank. That warrants a smaller penalty than intentional fraud, the agency said.
