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Judge Rakoff's Ruling in S.E.C. v. Citigroup Global Markets

Judge Rakoff's Ruling in S.E.C. v. Citigroup Global Markets

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Categories:Business/Law
Published by: DealBook on Nov 28, 2011
Copyright:Attribution Non-commercial

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UNITED STATES
DISTRICT
COURT
SOUTHERN
DISTRICT
OF
NEW
YORK
U.S.
SECURITIESCOMMISSION,
AND
EXCHANGE
x
11
Civ.
7387
(JSR)
Plaintiff,
OPINION
AND
ORDER
v-
CITIGROUP
GLOBAL
MARKETS
INC.,
Defendant.
-------------
x
JED
S.
RAKOFF,
U.S.D.J.
On
October
19,
2011,
the
U.S.
Securities
and
Exchange Commission
(the
"S.E.C.
U)
fi
this
lawsuit,
accusing defendant
Citigroup
Global
Markets
Inc.
("Citigroup") of
a
substantialsecurit
fraud.
According
to
the
S.E.C.'s
Complaint,
after
Citigroup
realized
in
-I
2007
that
the
market
for
mortgage
backed
securities
was
beginning
to
weaken,
tigroup
created
a
billion-dollar
Fund
(known
as "Class
v
Funding
IIIU)
that
allowed
it
to
dump
some
dubious
assets
on
misinformed
investors.
This
was
accomplished
by
Citigroup's
misrepresenting
that
the
Fund's
assets
were
attractive
investments
rigorously
selected
by
an
independent investment
adviser,
whereas
in
fact
tigroup
had
arranged
to
include
in
the
portfolio
a
substantial
percentage of
negative
projected
assets
and had
then taken
a
short
positionin
those
very
assets
it
had
helped
select.
Complaint
~~
I,
2, 58. Having
structured
the
Fund
as
a
vehic
for
unloading
1
 
dubious
assets
on
unwitting
investors, id.
,
44,
Citigroup
ized
net
profits
of
around
$160
million,
id.
,
63
t
whereas
the
investors
as
the
S.E.C.
later
revealed,
lost
more
than
$700
million.
See
S.E.C.'s
Memorandum
of
Law
in
Response
to
Questions
Posed
by
the
CourtRegarding Proposed
Settlement
("SEC
Mem.")
at
17.
In
a
parallel
Complaint
filed
the
same
day
against
Citigroup
employee
Brian Stoker, see
U.S.
Securities
and
Exchange Commission
v.Brian
H.
Stoker,
11
Civ.
7388(JSR)
,
the
S.E.C.
alleged
that
Citigroup
knew
in
advance
that
it
would
be
difficult
to
sell
the
Fund
if
tigroup disclosed
its
ion
to
use
it
as
a
vehic
to
unloadhand-picked
set
ofnegatively
projected
assets,
see
Stoker
Complaint
~
25.
Specifically,
paragraph
25
of
the
Stoker
Complaint
alleges
(in
language
some
of
which
is
notably
missing
from
the
Citigroup
Complaint)
that:
tigroup
knew
it
wouldbe
difficult
to place
the
liabilities
of [the
Fund]
if
it
disclosed
to
investors
its
intention
to
use
the
vehicle to short
a
hand-picked
set
of
[poorly
rated
assets]
....
By
contrast,
Citigroup
knew
that
representing
to investors
that
an
experienced
third-party
investment
adviser
had
selected
the
portfolio
would
facil
the
placement
of
the
[Fund's]
liabilities.
(emphasis
supplied)
Although
this
would
appear
to
be
tantamount
to
an
allegation
of
knowing
and
fraudulent
intent("scienter,"in
the
lingo of
securities
law),
the S.E.C.,
for
reasons of
its
own,
chose
to
charge
Citigroup
Nothing
in
this
Opinion
and
Order has
any
bearing
on
the
case
against
Stoker,
which
is
currently
scheduled
to
commence
trial
on
July
16,
2012.
2
 
only with
negligence,
in
violation
of Sections
l7(a)
(2)
and
(3)
of
the
Securit
s
Act,
15
U.S.C.
§
77q(a)
(2)
and
(3).
Complaint
~
65.
Simultaneously with
the
filing
of
its
Complaint
against
Citigroup,the
S.E.C.
presented
to
the
Court
for
its
signature
a
"Final
Judgment
As To
Defendant
tigroup
Global
Markets
Inc."
(the
"Consent
Judgmentlf),
together
with
a
Consent
of
Defendant
Citigroup
Global
Markets
Inc.
(the
"Consent")
that
rec
that
Citigroup
consented
to
the
entry
of the
Consent
Judgment"
[w]ithout
admitting
or
denying
the
allegations
of
the
complaint
....
"
Consent
~
2.
The
Consent
Judgment
(I)
"permanently
restrained
and
enjoined"
tigroup
and
its
agents,
employees,
etc.,
from
future
violations
of Sectionsl7(a)
(2)
and
(3)
of
the
Securities
Act,
(II) required
Citigroup
to
disgorge
to
the
S.E.C.
Citigroup's
$160
million in
profits,
plus
$30
million
in
interest
thereon,
and
to
pay
to
the
S.E.C.
a
civil
penalty
in
the
amount
of
$95
million,
and
(III)
requiredCitigroup
to
undertake
for
a
period
of
three years,subject
to
enforcement
by
the
Court,
certain
internal
measures
designed
to
prevent
recurrences
of
the
ties
fraud
here
perpetrated.
Upon
receipt
of
these
submissions,
the
Court,
by
Order
dated
October
27,2011,
put
some
questions
to
the
parties
concerning
the
proposed
Consent
Judgment,
to
which
the
parties
responded
both
in
writing,
see
SEC
Mem.,
supra,
and
Memorandum
on
Behalf
of Citigroup
Global
Markets
Inc.
Support
of the
Proposed
Final
Judgment
and
3 

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