The
Securities and Exchange Commission has filed papers citing a “legal error” and seeking a review of last month’s decision by a federal district court to reject a $285 million settlement between the regulator and Citigroup.

“We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits. For this reason, today we filed papers seeking review of the decision in the US Court of Appeals for the Second Circuit,” Robert Khuzami, the organization’s director of the division of enforcement, said in a statement.

The decision relates to Citigroup Global Markets, a broker-dealer subsidiary of New York-listed Citigroup, which in October agreed to pay the multi-million pound settlement over the marketing and sale of collateralized debt obligations. Because the CDO defaulted, investors were left with losses while Citigroup made $160 million on fees and trading profits, according to the SEC.

The decision of the Federal District Court in New York to reject the settlement is over the fact that it allows the firm to neither deny nor admit the charges, a standard feature of settlements between the regulator and the industry which the SEC claims allows it to put money “back in the pockets of harmed investors without years of courtroom delay,” and also to avoid the risk of losing at trial or recovering less than the settlement amount.

“We believe the court was incorrect in requiring an admission of facts - or a trial - as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions. Indeed, in the case against Citigroup, the SEC filed suit after a thorough investigation, the findings of which were described in extensive detail in a 21-page complaint,” Khuzami’s statement continued.

“The court’s new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country. In fact, courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide.”

In the Citigroup case, the fine is less than the investor losses suffered, but the regulator says the $285 million “represents most of the total monetary recovery that the SEC itself could have sought at trial,” and does not preclude investor action. The Commission also says that, in deciding whether or not to settle, it considers “limitations under the securities laws,” and that in this case the applicable stature does not allow it to recover the amount lost by investors, but limits it to the recovery of ill-gotten gains plus a monetary penalty up to the value of such gains.