Back to top

Analyst Blog

On Wednesday, the 2nd U.S. Circuit Court of Appeals in Manhattan rescinded the decision of U.S. District Judge Jed Rakoff related to Citigroup Inc. (C - Analyst Report) – U.S. Securities and Exchange Commission (SEC) settlement of $285 million. The settlement was to compensate investors who were misled by Citigroup with a housing market related collateralized debt obligation (CDO).

The federal judge rejected the settlement in Nov 2011, citing that it was not fair, reasonable or adequate and not in public interest. The judge objected to the practice of settlement by the SEC, under which the companies neither agree nor deny the charges made by the defendants. The settlement, which involved a loss of over $700 million by investors, has been referred to as a “pocket change” by the judge.

As per Rakoff, such protective shields provided to banks by regulators would further encourage them to indulge in such acts. These unlawful activities by the banks have affected the total economy to a large extent. Any wrong step in support of the banks would prevent these facts from emerging in the interest of the public.

Notably, the SEC accused Citigroup of misleading investors while selling a $1 billion fund in 2006 and 2007, which was invested in mortgage-related securities. Citigroup was accused of not letting investors know that it was betting against many of the assets. Incidentally, Citigroup neither admitted nor denied the wrongdoing that it had been accused of.

On the contrary, the SEC was not convinced of the judge’s decision and demanded more judicial power to take decisions while increasing the agency's authority to levy a fine on the companies and individuals. According to the SEC, the judge committed a legal error by setting such a new standard, which in turn would deprive investors of substantial, certain and immediate relief.

Therefore, the 2nd U.S. Circuit Court of Appeals gives a green signal to the SEC for determining whether the settlement requires admission of wrongdoings or not in such settlements. Moreover, such a ruling will help regulators return money to aggrieved investors even without admission of wrongdoings.

Post the financial crisis, the SEC ramped up its efforts to regulate institutions and penalize them for wrongdoings and misrepresentation of facts while selling their investment products. Besides Citigroup, others that reached settlements or have been penalized in the past include Bank of America Corp. (BAC - Analyst Report), Wells Fargo & Co. (WFC - Analyst Report) and The Goldman Sachs Group Inc. (GS - Analyst Report).

We believe that while such settlements dent the company’s financials to some extent, they also reduce the litigation overhang. Currently, Citigroup carries a Zacks Rank #3 (Hold).

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
CITI TRENDS… CTRN 21.53 +5.49%
GTT COMMUNI… GTT 11.65 +4.11%
ALLERGAN IN… AGN 161.82 +3.99%
WILLIAMS(C)… CWEI 117.06 +3.73%
FIRSTSERVIC… FSRV 54.81 +2.62%