On November 28, 2011, Judge Jed S. Rakoff of Federal District Court filed a “blistering” 15-page opinion in response to the SEC’s proposed $285 million settlement over a $1 billion CDO packaged by Citigroup. According to the SEC, Citigroup’s clients took a loss of $700 million while Citi raked in $160 million in profits on its short position. Citigroup neither confirms nor denies the charges.

Judge Rakoff called the settlement “pocket change” for Citigroup. Furthermore, the Judge characterized the proposed settlement as: “neither fair, nor reasonable, nor adequate, nor in the public interest.” The Judge refused to approve the proposed settlement and ordered the case to trial on July 12, 2012. (For a copy of the opinion, click here).

The Wall Street Journal reports that SEC Enforcement Chief, and former Deutsche Bank Americas General Counsel from 2004-09, has “vociferously defended” the settlement.  In reference to the proposed Citigroup settlement, Mr. Khuzami stated:  “To turn down that type of reasonable settlement due to the absence of an admission [of guilt] is in my view often unwise policy.”  In its brief to Judge Rakoff asking for approval of the settlement, Khuzami’s SEC Enforcement Division took the position that “the public interest … is not part of [the] applicable standard of judicial review.”

Why would Khuzami vociferously defend the proposed Citigroup settlement as “reasonable”? The answer, according to Yves Smith, author of Naked Capitalism and Principal of Aurora Advisors, Inc., may have to do with Khuzami’s role at Deutsche Bank. The Journal has reported that Khuzami oversaw Deutsche CDOs.  Smith has dubbed Khuzami “Mr. Something to Hide.” Smith writes:

Any serious investigation of CDO bad practices would implicate Deutsche Bank, and presumably, Khuzami. Why was a Goldman Abacus trade probed, and not deals from Deutsche Bank’s similar CDO program, Start? Khuzami simply can’t afford to dig too deeply in this toxic terrain; questions would correctly be raised as to why Deutsche was not being scrutinized similarly. And recusing himself would be insufficient. Do you really think staffers are sufficiently inattentive of the politics so as to pursue investigations aggressively that might damage the head of their unit?