(CN) - U.S. District Court in Manhattan threw-out the SEC's proposed $285 million settlement against Citigroup, finding it "neither fair, nor adequate, nor in the public interest," and ordered the parties to go to trial.
     Federal judge Jed Rakoff said the settlement was little more than a slap on the wrist for Citigroup Global Markets Inc., describing it as a "very good deal" for the financial behemoth. The judge was also critical of the SEC for not forcing the Wall Street firm to admit or deny that it had knowingly dumped millions in toxic mortgage backed assets into a billion dollar CDO.
     But Robert Khuzami, SEC Director of the Division of Enforcement, pushed back against the court's ruling.
     "The court's criticism that the settlement does not require an 'admission' to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial." Khuzami said in a statement.
     Assets from the fund were sold on to unwitting investors in 2007. Citigroup, which had bet against $500 million of assets it helped select, walked away with $160 million in net profits after the housing market tanked. Meanwhile, investors were hit with a $700 million loss, according to the ruling.
     "It is harder to discern from the limited information before the court what the SEC is getting from this settlement other than a quick headline. By the SEC's own account, Citigroup is a recidivist ... and yet, in terms of deterrence, the $95 million civil penalty that the consent judgment proposes is pocket change to any entity as large as Citigroup," Rakoff wrote.
     "While the SEC claims that it is devoted, not just to the protection of investors but also to helping them recover their losses, the proposed consent judgment, in the form submitted to the court, does not commit the SEC to returning any of the total of $285 million obtained from Citigroup to the defrauded investors but only suggests that the SEC 'may' do so ... In any event, this still leaves the defrauded investors substantially short-changed," the judge stated.
     The SEC "for reasons of its own," only charged Citigroup with negligence instead of fraud. That, coupled with the agency's decision to allow Citigroup to walk away without any admission of wrongdoing, "deals a double blow to any assistance the defrauded investors might seek to derive from the SEC litigation in attempting to recoup their losses," the judge ruled.
     Rakoff stated that the SEC was asking the court "to employ its power and assert its authority when it does not know the facts."
     "An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts solid facts, established either by admissions or by trials-it serves no lawful or moral purpose and is simply an engine of oppression.
     "Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the SEC of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances," the judge wrote.
     Khuzami, however, said the court's ruling swept aside "decades of established practice throughout federal agencies and decisions of the federal courts."
     "Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court," Khuzami said.
     He added that the SEC had not just presented "'mere' allegations, but the reasoned conclusions of the federal agency responsible for the enforcement of the securities laws after a thorough and careful investigation of the facts."
     "Although the court questions the amount of relief obtained, it overlooks the fact that securities law generally limits the disgorgement amount the SEC can recover to Citigroup's ill-gotten gains, plus a penalty in an amount up to a defendant's gain. It was for this reason that we sought to recover close to $300 million-all of which we intended to deliver to harmed investors. The SEC does not currently have statutory authority to recover investor losses."
     "We will continue to review the court's ruling and take those steps that best serve the interests of investors," Khuzami stated.