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

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

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.”