Oh, Snap: Brave Judge Rejects the SEC’s Latest Settlement with Citigroup
You don't want to mess with the Hon. Jed Rakoff of the United States District Court for the Southern District of New York.
He's the judge, after all, who sought to declare the federal death penalty unconstitutional (even though the parties didn't ask him to), refused in 2009 to approve the SEC's settlement with Merrill Lynch over bonuses until the penalty increased from $33M to $150M, and who ordered the Pentagon in 2006 to release the names of all Guantanamo detainees.
Today, Judge Rakoff added to his legacy of independence by rejecting the SEC's efforts to settle with Citigroup for $285M over mortgage-backed securities fraud allegations. See, the agreement they reached didn't force Citigroup to admit that it had engaged in fraud—thus impairing the ability of shareholders to use the settlement to support their civil claims—and Judge Rakoff's short opinion absolutely blasts the collusion he sees between the SEC and those it regulates.
Under the law, Judge Rakoff was obligated to determine whether this settlement was "fair, reasonable, and in the public interest"; the SEC argued that no, the public interest didn't actually matter—and, if it did, the SEC itself could assess what the public needed. No no no, said the Judge:
Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensable attribute of the federal judiciary. [...] Before the Court determines whether the settlement is fair, it must ask a preliminary question: fair to whom? ... [T]he answer is fair to the parties and to the public. [...]
Applying these standards to the case in hand, the Court concludes, regretfully, that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest.
Why not? Because a settlement that didn't force Citigroup to admit its culpability allows for too much weaseling:
Here, the S.E.C.'s long-standing policy - hallowed by history, but not by reason - of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact. There is little real doubt that Citigroup contests the factual allegations of the Complaint. In colloquy with the Court, counsel for Citigroup expressly reconfirmed that his client was not admitting the allegations of the Complaint. He also noted, correctly, that he was free - notwithstanding the S.E.C.'s gag order precluding Citigroup from contesting the S.E.C.'s allegations in the media - to fully contest the facts in any parallel litigation; and he strongly hinted that Citigroup would do just that. ...
As for common experience, a consent judgment that does not involve any admissions and that results in only very modest penalties is just as frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies.
Which leads directly into the part where you might say, oh, snap:
Of course, the [SEC's] policy of accepting settlements without any admissions serves various narrow interests of the parties. In this case, for example, Citigroup was able, without admitting anything, to negotiate a settlement that (a) charges it only with negligence, (b) results in a very modest penalty, (c) imposes the kind of injunctive relief that Citigroup (a recidivist) knew that the S.E.C. had not sought to enforce against any financial institution for at least the last 10 years, and (d) imposes relatively inexpensive prophylactic measures for the next three years. In exchange, Citigroup not only settles what it states was a broad-ranging four-year investigation by the S.E.C. of Citigroup's mortgage-backed securities offerings, but also avoids any investors' relying in any respect on the S.E.C. Consent Judgment in seeking return of their losses. If the allegations of the Complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business.
It is harder to discern from the limited information before the Court what the S.E.C. is getting from this settlement other than a quick headline. By the S.E.C.'s own account, Citigroup is a recidivist, and yet, in terms of deterrence, the $95 million civil penalty that the Consent Judgment proposes is pocket change to any entity as large as Citigroup.
Oh. He was just getting started. Here goes:
[The Consent Judgment] is not reasonable, because how can it ever be reasonable to impose substantial relief on the basis of mere allegations? It is not fair, because, despite Citigroup's nominal consent, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged is patent. It is not adequate, because, in the absence of any facts, the Court lacks a framework for determining adequacy. And, most obviously, the proposed Consent Judgment does not serve the public interest, because it asks the Court to employ its power and assert its authority when it does not know the facts.
An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts – cold, hard, solid facts, established either by admissions or by trials - it serves no lawful or moral purpose and is simply an engine of oppression.
Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances.
Barring an improved settlement, this matter will go to trial in July 2012.