WC complained – well, more of a screed, actually – that the proposed settlement between the U.S. and Citigroup over the latter’s patent fraudulent activity was patently unfair.
To WC’s astonishment, the trial judge asked to approve the settlement has refused to do so.
Gasp! Justice?
The judge, Jed S. Rakoff of United States District Court in Manhattan, ruled that the S.E.C.’s $285 million settlement, announced October 19, is “neither fair, nor reasonable, nor adequate, nor in the public interest” because it does not provide the court with evidence on which to judge the settlement. The court had a couple of interesting points:
As these and similar authorities make plain, a court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment its injunctive powers will serve, or disserve, public interest. 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.
The U.S. District Judge is saying that while he will give deference to a settlement the SEC proposes, he won’t rubber stamp them without evidence they comply with the law.
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. Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards.
So far it’s a U.S .District Judge demanding more information before blessing a deal. Unusual, but not extraordinary. But Judge Rakoff went further, closing the door on secret SEC deals:
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.
In effect, the judge is calling out the SEC for not properly doing its job. He’s refusing to play their little game.
Of course, the 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, see SEC Mem. at 23, 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, Tr. 27, 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.
The SEC’s complaint alleged fraud, intentional misconduct, by Citigroup. And made a forceful case. That’s punitive damage territory. If the SEC proceeded to trial and proved it, Citigroup would face extremely serious damages, billions of dollars. And, more importantly, the investors who were ripped off would have a prepaid ticket to recover their full losses, and maybe some more punitives. Citigroup might be, you know, deterred.
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, SEC Mem. at 21, 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. While the S.E.C. claims. Although the S.E.C. asserts that it is devoted, not just to the protection of investors but also to helping them recover their losses, the proposed Consent Judgment, in the form submitted to the Court, does not commit the S.E.C. to returning any of the total of $285 million obtained from Citigroup to the defrauded investors but only suggests that the S.E.C. “may” do so. Consent Judgment at 3. In any event, this still leaves the defrauded investors substantially short-changed.
Here’s the punchline:
The point, however, is not that certain narrow interests of the parties might not be served by the Consent Judgment, but rather that the parties successful resolution of their competing interests cannot be automatically equated with the public interest, especially in the absence of a factual base on which to assess whether the resolution was fair, adequate, and reasonable.
Judge Rakoff is saying that it is not going to be business as usual. The S.E.C., if it wants to gain approval of consent judgments, is going to have to show the court that it is in the public interest to do so. And that may require the S.E.C. to do its job, rather than slapping the wrists of the super-rich.
As WC said, a modest victory, but potentially an important one. These days, we must cherish even the modest wins.
Wickersham's Conscience 