Citigroup Hopes for Settlement with SEC in Court Today

November 9th, 2011 by Trefis Team
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Citigroup (NYSE:C) and the Securities & Exchange Commission (SEC) will try their best to bring their mortgage-related lawsuit to a close in court today by getting their $285 million settlement cleared by U.S. District Judge Jed Rakoff. [1] The lawsuit was filed when various investors alleged that Citigroup had sold them toxic mortgage-backed securities which the bank had already bet against. While the SEC and Citigroup came to a settlement on October 19th, which entailed a payment of $190 million which the bank earned as profit and a $95 million fine, Judge Rakoff refused to enforce the settlement before 9 of his questions were answered by the two parties. Notably, he questions the rationale for the settlement amounts – including the $95 million fine which he mentions is less than a fifth of what Goldman Sachs (NYSE: GS) paid for a similar settlement in July last year. [2] The global financial institution’s shares are in for a rough ride if he proposes a higher settlement amount.

We are currently revisiting our $40 price estimate for Citigroup’s stock, in light of the weak global economic outlook in the near future.

The SEC Believes That the Settlement is Adequate

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Citigroup and SEC have agreed to settle the mortgage-securities lawsuit with a one-time cost of $285 million, with Citigroup maintaining that the incident was due to “control weaknesses” and neither accepting nor denying the charges.

The SEC filed a reply to Judge Rakoff’s questions on Monday, stating that settlement does not unfairly harm the financial group’s shareholders for the sale of the securities which the SEC believes led to investors losing between $160 million and $700 million of their money. [1] [2]

The cost of the settlement will add to the expenses of the financial group’s sales & trading division – driving down the margin. To see how an increase in these costs can affect our estimate for Citigroup’s share, you can make changes to the chart above.

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Notes:
  1. SEC defends $285 million Citigroup accord, Reuters, Nov 7 2011 [↩] [↩]
  2. Judge Rakoff’s Order [↩] [↩]