A federal judge on Tuesday denied a request by a former Citigroup Inc director to dismiss regulatory fraud charges over his alleged role in putting together and marketing a risky collateralized debt obligation.
U.S. District Judge Jed Rakoff in Manhattan denied a request by Brian Stoker to dismiss U.S. Securities and Exchange Commission charges over his alleged role in the transaction, which caused more than $700 million (451 million pounds) of investor losses.
The same judge previously rejected the SEC's $285 million fraud settlement with Citigroup over mortgage investments, while allowing the regulator to continue its case against Stoker, the only individual it charged.
The case arose from allegations that Citigroup, betting on a housing downturn, in 2007 sold $1 billion of risky mortgage-linked securities without telling investors it had taken a $500 million "short" position on expectations some would fail.
Stoker argued that any misstatements or omissions were not material, but Rakoff said it is premature to dismiss the SEC case, ahead of a scheduled July 16 jury trial.
"It is true that taking a proprietary short position in order to profit from the falling housing market is not itself evidence of fraud," he wrote. "But, there appears to be much more to the evidence here."
John Keker and Jan Nielsen Little, who are lawyers for Stoker, did not immediately respond to requests for comment.
A Citigroup spokeswoman declined to comment, but said Stoker no longer works for the New York-based bank.
The SEC claimed that Stoker had been the main deal manager for the Class V Funding III CDO transaction, and had been principally responsible for its marketing materials.
It contended that these materials failed to reveal Citigroup's role in choosing the underlying debt, though a unit of Credit Suisse Group AG was acting as collateral manager, and concealed the $500 million short position.
Rakoff said it is an open issue as to whether Citigroup's role "was unusual enough to merit different disclosures from those required for a traditional CDO."
He also said a jury should decide whether Stoker's actions helped the bank to collect improper fees and profit.
In rejecting Citigroup's $285 million settlement last November, Rakoff had said the SEC's failure to require the bank to admit or deny its charges left him no way to decide whether the accord was fair and in the public interest.
That decision threatened to undermine the SEC's decades-long practice in reaching settlements with companies.
In March, a federal appeals court in New York stopped just short of reversing the decision, saying federal courts cannot "dictate policy to executive administrative agencies."
The appeals court is expected this year to consider whether to reverse Rakoff's decision. Because the SEC and Citigroup want this outcome and are on the same side, the court appointed an outside lawyer to argue for Rakoff's position.
The case is SEC v. Stoker, U.S. District Court, Southern District of New York, No. 11-07387.
(Reporting By Jonathan Stempel in New York; Editing by Andrew Hay)