Citigroup Inc. (NYSE:C), which has seen its $285 million settlement with the Securities and Exchange Commission (SEC) rejected by a federal judge, now apparently has an advocate in its fight with the SEC – the judge himself. Judge Jed Rakoff is now defending his decision with a rare rebuttal to the U.S. Court of Appeals for the Second Circuit, which is looking at this case and Rakoff’s behavior in rejecting the settlement.
Citigroup Inc. (NYSE:C) was before Rakoff last fall facing charges by the SEC that Citigroup misled investors in a $1 billion investment program surrounding residential mortgages in 2007. The bank took a $500 million short position in the overall program, and took a loss on a $100 million long position on the notes. The original settlement offered that Citigroup admit no liability in the case.
However, Judge Rakoff ruled that he could not accept the settlement as written because the two sides could not agree on any statement of fact in the case, and because the SEC did not show him its evidence in the case. The case went to the Court of Appeals, and the panel suspended the case on the grounds that Judge Rakoff tried to dictate from the bench what an administrative agency should do. The district court appointed a lawyer to represent Rakoff in a September hearing to determine whether the judge acted appropriately in rejecting the Citigroup Inc. (NYSE:C) settlement.
What is truly rare about this, though, is that Rakoff’s lawyer, John “Rusty” Wing, sent a brief to the court explaining that Judge Rakoff’s decision was misread – that Judge Rakoff had not actually made a final ruling because he was waiting for the evidence from the SEC regarding Citigroup Inc. (NYSE:C) activity and facts of the case before proceeding. And because there hasn’t been an actual decision, the Court of Appeals does not have jurisdiction over the case.
So in September, there will be strange bedfellows indeed – a hearing with a judge on one side and the SEC and Citigroup Inc. (NYSE:C) on the other. To know that, for now, Citigroup Inc. (NYSE:C) does not have to pay out nearly $300 million in fines to the SEC looks better on the bottom line for investors like hedge funds who are positioned in Citigroup stock – funds like Bill Ackman’s Pershing Square, which had a $955 million position in Citigroup at the end of March, which was nearly 12 percent of its multi-billion-dollar portfolio.