The Securities and Exchange Commission, an organization designed to regulate and oversee the financial industry, is charged with acting in investors’ best interests. Most of the time, however, the SEC works on behalf of the large financial companies under its purview. As a result, when consumers demand that companies be held accountable for misleading investors or playing a role in a systemic collapse of the economy, the regulators tend to look the other way. Some companies get by with a slap on the wrist, settling lawsuits with a paltry penalty.
That appeared to be the case recently when Citigroup and the SEC came to an agreement whereby the company would pay $285 million, or 7.56% of that quarter’s profit, to settle a lawsuit that charged that the company did not properly disclose the risk when selling collateralized debt obligations (CDOs) and bet against the same investments the company sold to investors. The benefits of a settlement like this would be that Citi could pay the small fine from its cash reserves without admitting wrongdoing, promise they’ll never break the rules again, and continue to operate business as usual.
Judge Jed S. Rakoff of the Federal District Court in Manhattan was not pleased with the resolution or collusion between Citi and the SEC. The judge rejected the settlement because it was not fair, reasonable, adequate, or in the best interest of the public. He demanded the company and the regulator to shed light on the facts of the case, something this settlement might have avoided, protecting the company from any real criticism. A settlement would mean that affected investors could not sue Citi, but if the SEC were to successfully win a case against Citigroup, proving the company was in the wrong, that decision could be used by harmed investors who sue the bank. At the core of the matter is whether a company should be allowed to avoid admitting guilt.
The trial will begin in July 2012.