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Citigroup, SEC Defend $285 Million CDO Settlement as Fair

Citigroup Inc. and the U.S. Securities and Exchange Commission defended their $285 million settlement of claims that the bank misled investors in collateralized debt obligations.

The SEC, responding to questions raised last month by U.S. District Judge Jed Rakoff in Manhattan, today called the settlement with Citigroup “fair, adequate and reasonable,” and said it should be approved by the court. Rakoff scheduled a hearing on the settlement Nov. 9.

“The proposed settlement reasonably reflects the scope of relief likely to be obtained by the commission under the applicable law if successful at a trial on the merits,” the SEC said in a brief. “The settlement allows the commission to devote resources that may have been required for this matter to investigate other fraud and misconduct.”

Rakoff, who in 2009 rejected a $33 million settlement between the agency and Bank of America Corp., asked Citigroup and the SEC to address nine questions about the proposed settlement. The questions included, “Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?”

Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, the third-biggest U.S. bank, didn’t immediately return a voice-mail message seeking comment on the SEC filing.

Public Interest

The SEC argued that the U.S. Supreme Court has endorsed settlements in which the defendant doesn’t admit liability. If Citigroup had admitted fault in the settlement, that could be used against it by private investors suing the bank, the SEC said.

In response to another of Rakoff’s questions, the SEC estimated that investors lost more than $700 million as a result of Citigroup’s alleged actions.

Rakoff also told the parties to address whether the public has an interest in determining whether the SEC claims against Citigroup are true and how the amount of loss to victims and the proposed judgment against the bank were calculated.

The judge questioned the SEC’s plan for preventing future violations and asked why Citigroup shareholders -- not the individual executives responsible for the alleged fraud -- are required to pay.


“How can a securities fraud of this nature and magnitude be the result simply of negligence?” Rakoff wrote.

In its own filing today, Citigroup also said the settlement was fair and asked the judge to consider the impact on its shareholders of “any outcome other than a negotiated ‘no admit, no deny’ settlement.”

The bank’s management and board used their business judgment when they chose to settle the case in the way they did and in choosing not to litigate, according to the filing.

“The ‘public interest’ is served by sophisticated litigants compromising complicated matters in a manner that avoids wasteful litigation and exposing both parties to extreme results,” the bank wrote.

The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-7387, U.S. District Court, Southern District of New York (Manhattan).

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