July 28, 2021

Judge Says S.E.C. Misled Two Courts in Citi Case

Judge Jed S. Rakoff of the Federal District Court in Manhattan issued a supplemental order saying that the S.E.C. appeared to file a “materially misleading” request with the Court of Appeals for the Second Circuit earlier this week, when the commission sought an emergency halt to further proceedings in the case.

The S.E.C. was seeking the temporary stay while it appealed Judge Rakoff’s earlier decision to reject a proposed $285 million settlement between the two parties and to order the two sides to prepare for a July trial.

Judge Rakoff said the S.E.C.’s filing to the appeals court was misleading in its argument that an emergency halt was needed because Citigroup had until Jan. 3 to file an answer in district court to the S.E.C.’s fraud case against it.

Judge Rakoff said the S.E.C. knew or should have known that Citigroup was planning to ask him to dismiss the case entirely, negating the urgency to halt proceedings. The appeals court granted the temporary stay on Tuesday, saying it would consider a longer halt on Jan. 17.

The case involves S.E.C. charges that Citigroup misled customers when it sold $1 billion in mortgage-related securities without telling investors that it was betting against some of the mortgage investments in the portfolio.

Judge Rakoff said that, in addition, the S.E.C. and Citigroup each misled the district court by not telling him that the S.E.C., with Citigroup’s approval, had applied to the appeals court for the emergency stay more than four hours before he issued a decision on the S.E.C.’s same request for a stay in his court.

He said that the S.E.C. had the chance and the obligation to tell him about its emergency motion to the Court of Appeals after it was filed on Tuesday, because the commission and Citigroup had a telephone conference call with Judge Rakoff about his management of the case. In that conversation, Citigroup asked Judge Rakoff to be allowed to file extra pages in its coming motion to dismiss the case.

By not informing him of its appeals court plea, “there appears to have been a similar misleading of this court,” the judge wrote, because both the S.E.C. and Citigroup “held back from this court material information it needed to do its job.”

The judge even complained that he had spent the Christmas holiday considering the stay request and drafting an opinion in order to speed the case along.

Judge Rakoff said that the purpose of the supplemental order, which was filed in his court, was “both to make the Court of Appeals aware of this background and to attempt to prevent similar recurrences.” It ordered the parties to “promptly notify this court of any filings in the Court of Appeals.”

John Nester, an S.E.C. spokesman, said: “We will respond as appropriate in the proceedings before the Court of Appeals.” A Citigroup spokeswoman declined to comment on the new filing.

Judge Rakoff has sharply rebuked the S.E.C. over its method of settling fraud cases over the last two years. In 2009, he rejected a proposed settlement between the S.E.C. and Bank of America over charges that the bank misled its shareholders in filings regarding its takeover of Merrill Lynch.

In the Citigroup case, the judge took aim at the S.E.C.’s practice of settling cases without making the defendant either confirm or deny the charges. Such an agreement means there is no established set of facts in the case, the judge said, robbing judges of the ability to determine whether a proposed settlement is “fair, reasonable, adequate and in the public interest.”

Article source: http://feeds.nytimes.com/click.phdo?i=e921f2ee55c2fc42d570a18aa899b8ff

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