Judge on Citi's SEC Deal: "An engine of oppression"

Posted by: Joel Stonington on November 28, 2011 at 7:19 PM

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Federal Judge Jed S. Rakoff struck down a $285 million settlement between the SEC and Citigroup on Monday. To outsiders who’ve complained that banks have gotten away with slaps on the wrist, it might appear that the problem with the settlement was that it didn’t involve enough money and wasn’t tough enough. For those who’ve been following the legal issues, it’s really about information and disclosure.

“Basically, the judge threw down the gauntlet, not just to the SEC but to any other government agency seeking to settle a case without admissions or a trial,” said Joseph A Grundfest, professor at Stanford Law School and former SEC commissioner.

The SEC alleged that Citigroup misled investors on a package of mortgage-backed securities. The bank allegedly shorted those securities to generate profits of $160 million. According to the complaint, investors lost more than $700 million.

The nature of this settlement, and other similar cases, leave little information divulged, even to the judge. Without those details, Rakoff wrote that he had little basis to decide if the settlement was fair. The judge questioned why the settlement was so modest, why there was so little evidence for the charges, and why the SEC decided on lesser charges despite allegations of fraud: “The SEC, for reasons of its own, chose to charge Citigroup only with negligence.”

“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” Rakoff wrote. “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.”

Before Rakoff’s decision, the agreement between the SEC and Citigroup was seen by some bloggers as just another example of letting corporate wrongdoers off easy. As one writer put it on AlterNet, a progressive online news site, “Once again bank criminals were allowed to walk without admitting anything! Common sense tells us nobody would agree to pay more than a quarter of a billion dollars unless did they’d done something very, very wrong.”

Rakoff and other federal judges have opposed settlements for alleged wrongdoing at major banks. In 2007, U.S. District Judge Ellen S. Huvelle of the District of Columbia refused to approve a $75 million settlement between Citigroup and the SEC, writing, “You expect the court to rubber-stamp, but we can’t,” according to the Wall Street Journal. And in 2009, Judge Rakoff rejected a $33 million settlement with Bank of America (it was approved a year later, for $150 million). At that time, Rakoff said that the final result was “half-baked justice at best,” according to the New York Times.

It may seem that Judge Rakoff is taking a stance that echoes a central complaint of the Wall Street protesters. But John C. Coffee Jr., a professor at Columbia Law School and friend of Rakoff, cautioned against that view. “Don’t confuse judge Rakoff with some member of the Occupy Wall Street movement,” Coffee said. “He spent his professional career defending corporations and investment banks as a securities litigator.”

Coffee noted that Rakoff had taken it a step further by saying a settlement without admitting or denying guilt is viewed as “a cost of doing business” by companies that deal with the SEC.

Coffee continued: “The SEC is an overworked, underfunded agency under great strain. I sympathize with them. The answer is not to enter into weak, cosmetic settlements. The answer is to bring fewer cases and litigate them more intensively.”

Reader Comments

Pissed Off 99%er

November 29, 2011 1:13 AM

Judge Rakoff is a hero.

He needs to be nominated for Mt. Rushmore.

time to put some real penalties on the 'talented crooks' running the big banks
and ruining the world.

Data Doctor

November 29, 2011 1:55 AM

Finally some good news from Wall St. When someone defrauds someone they should be punished. By betting against the products they promoted and sold, Citi perpetrated a crime on their investors. But they weren't the only ones. Our financial system was rocked to the core by these mortgage frauds. Finally someone might be held accountable. Here's hoping it goes to trial!

TRussert

November 29, 2011 6:30 AM

Occupy Justice! Where are the other Judges willing to do the right thing?
Kudos Judge Rakoff!!!!!

Joseph McCaffrey

November 29, 2011 11:18 AM

Why is the SEC understaffed and overworked? That begs the question. The SEC is a weak because Congress wants the SEC to be weak. Congressmen, and it's easy to find out who they are, accept political donations and all kinds of help from the banks, the big Wall Street investment firms, and the lobbyists represent those interests, so those Congressmen intentionally starve the SEC. It seems to me that Judge Rakoff and the Occupy Wall Street movement are on the same page. Judge Rakoff is throwing this ugly case right back to the SEC. Now we should watch to see how Congress responds. If Congress continues to starve the SEC, we will know that the rot is in Congress, and among those Congressmen who are responsible for denying the SEC the resources to do its job. I suggest we look first at the Republican Congressmen who are sympathetic to the Tea Party. Zero in on those particular Congressmen and we're halfway toward solving the problem.

dalworth

November 29, 2011 12:58 PM

The people at these banks are like repeat offender drunk drivers. They take risks and often damage the property of others, maim them, even kill them...all to pursue the high and euphoria of their addiction.

At some point, these drunk drivers kill themselves, often with disastrous results for others, or they finally get sentenced to jail instead of being turned back out after a fine.

I agree: kudos to Judge Rakoff!

dalworth

November 29, 2011 1:00 PM

The people at these banks are like repeat offender drunk drivers. They take risks and often damage the property of others, maim them, even kill them...all to pursue the high and euphoria of their addiction.

At some point, these drunk drivers kill themselves, often with disastrous results for others, or they finally get sentenced to jail instead of being turned back out after a fine.

I agree: kudos to Judge Rakoff!

Russ

November 29, 2011 1:28 PM

If every Judge had the courage and soundness of character to give this type of judgment, he USA will rise to its best potential. Thank you Judge Rakoff. I am going to advise that all my lawyering family read everyone of your judgments.

Eric Miller

November 30, 2011 6:21 PM

It's a drop in the bucket--there should be more stands against routine and chummy government/corporate dealings which harm our fabric as a free and upright nation.

Gusto

December 4, 2011 4:36 AM

"I worry about "experts" who go unchallenged by public scrutiny", from Telling Lies by Paul Eckman

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