Rejected SEC-Citi Deal Prompts Another Challenge to Settlement

It seems Judge Jed Rakoff's rebuke of the Securities and Exchange Commission's proposed $285 million Citigroup settlement has influenced a colleague on the federal bench in Wisconsin.

A federal judge in Milwaukee, citing Rakoff's opinion, pushed the SEC to explain its vague proposed settlement with a Wisconsin-based headphones manufacturer Koss Corp. and its former CEO.

The SEC accused the company of failing to catch an embezzlement scheme and preparing inaccurate financial statements from 2005 to 2009 under the watch of Koss Corp.'s chief executive and former chief financial officer, Michael J. Koss.

Judge Rudolph T. Randa asked the SEC to explain why the court should find the proposed deal fair, reasonable, adequate, and in the public interest. Randa asked the SEC to respond to his request by Jan. 24.

The request comes a month after Rakoff, who presides in Manhattan, issued a strongly-worded order criticizing the SEC's method of settling allegations of misconduct by landing million-dollar settlements that let companies avoid admitting any wrongdoing. Citigroup was accused of peddling a fund of mortgage-related assets to investors, who allegedly list $700 million when the billion-dollar fund collapsed.

Rakoff said the SEC failed to establish any underlying facts in the case, making it difficult to determine whether the deal was fair and in the public's interest. The SEC defended the Citigroup settlement and appealed Rakoff's ruling, which the agency called a legal error that ushered in a new and unprecedented standard for approving settlements.

While Randa's request Tuesday is not nearly worded as strongly as the opinion from Rakoff, it is an indication that federal judges are willing to challenge regulators over their enforcement methods and refusing to rubber stamp settlements.

In Randa's four-page letter, he asked the SEC to defend part of the deal requiring Koss--the company's CEO and former CFO--to give up about $450,000, plus 160,000 options.

He also questioned a part of the deal requesting an injunction against the company and Koss that would bar them from committing future securities violations.

Without greater detail ... the injunctions lacks provisions for implementation by the company and/or [Koss, the CEO] and others bound by the injunctions, Randa wrote. If enforcement became necessary, the terms of such a vague injunction would make it difficult for the court.