Court Grants Delay in S.E.C.’s Case Against Citigroup

The United States Court of Appeals for the Second Circuit, based in New York, ruled that further action in the case would be delayed until at least Jan. 17, giving it time to rule on whether it would grant an expedited hearing of the appeal and whether the two sides should have to simultaneously prepare for a trial.

Judge Jed S. Rakoff of Federal District Court in Manhattan threw out the settlement in November and ordered the agency and Citigroup to prepare for a trial in July. Although Citigroup and the S.E.C. have jointly appealed Judge Rakoff’s decision, he said the underlying case should proceed, with the two sides continuing to prepare for court hearings in the case.

Citigroup had faced a Jan. 3 deadline to submit an answer to the S.E.C.’s fraud charges, initially filed in October. That requirement, the S.E.C. said, “threatens a central provision of the proposed consent judgment, namely that Citigroup would not deny the commission’s allegation.”

The S.E.C. and Citigroup entered the agreement to settle accusations that Citigroup had defrauded investors in a $1 billion fund invested in mortgage-related securities. The fund was sold by Citigroup in early 2007 as the housing market and mortgage securities were already showing signs of distress.

According to the S.E.C., Citigroup sold the securities without telling customers that it was stuffing the fund’s portfolio with mortgage investments that it thought would fail and that it was betting against the portfolio.

Citigroup agreed to pay $285 million in penalties and forfeited profits under the condition that it neither admit nor deny the S.E.C.’s accusations, a common settlement method used by the S.E.C. and other government enforcement agencies.

That provision, however, led Judge Rakoff to say that he had no agreed-upon facts by which to judge if the punishment was fair and adequate. Therefore, he rejected the settlement.

After it said it would appeal, the S.E.C. first asked Judge Rakoff himself to halt the proceedings temporarily. But on Tuesday he denied that request.

“In short, it seems patently clear that the parties have no basis for an appeal,” Judge Rakoff wrote.

The S.E.C. and Citigroup told the appeals court that they would suffer irreparable harm if they were forced to prepare for trial while the appeal was pending. A motions panel of the appeals court will consider whether to further stay the proceedings beginning Jan. 17.

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