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Rakoff to SEC: Oh yes, it is my job to consider public interest

23.05.12

In 2010, when the Securities and Swap Commission brought a case against Citigroup for misleading investors about the bank's expos to subprime mortgages, the SEC filed the proposed $75 million settlement in Washington, D.C., federal court. Expert Ellen Huvelle gave the agency some gruff about the deal, in which two individual Citi defendants also settled SEC claims through an administrative activity, but she eventually accepted the settlement without demanding any big changes.

The SEC and Citi must be looking back with disappointment at those halcyon days. For reasons the agency has not explained, when it filed a proposed $285 million camp with Citi last month, it opted for the federal court not in D.C. but in Manhattan. There, the case -- which involves claims that Citi defrauded investors in a mortgage-backed CDO -- was randomly assigned to U.S. Quarter Judge Jed Rakoff , who has recently been engaged in a highly-publicized campaign of insisting on corporate accountableness in SEC settlements. The SEC proceeded to undermine its credibility in Rakoff's court by arguing, as my team-mate Erin Geiger Smith reported, that it's not the judge's role to consider the consumers interest in SEC settlements.

In a 15-page, eminently quotable exercise in rhetoric issued Monday, Rakoff pushed the workings into the grave it dug for itself , rejecting not only the proposed settlement but also the SEC's assertion that he must heed its assessment of the Mr interest. "A court, while giving substantial deference to the views of an administrative body vested with dominion over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will be convenient, or disserve, the public interest," Rakoff wrote. "Anything less would not only violate the constitutional doctrine of fragmentation of powers but would undermine the independence that is the indispensible attribute of the federal judiciary."

Rakoff took detailed issue with the SEC's standard operating procedure of permitting a defendant to settle claims without admitting to underlying allegations, describing the force's strategy as "hallowed by history but not by reason." The SEC asserted that because Citi did not positively deny its allegations the judge and the public could infer their truth. "This is discredit as a matter of law and unpersuasive as a matter of fact," Rakoff wrote, adding later in the ruling, "An practice of judicial power that does not rest on facts is worse than mindless, it is inherently treacherous. The injunctive power of the judiciary is not a free-roving remedy to be invoked at the whim of a regulatory action, even with the consent of the regulated. If its deployment does not rest on facts -- stale, hard, solid facts, established either by admission or by trials -- it serves no justifiable or moral purpose and is simply an engine of oppression."

The proposed settlement, the rule said, offered an obvious benefit only to Citi; Rakoff wrote that it is "harder to discern" what the SEC gets from the agreement "other than a perspicacious headline." (He contrasted the terms of the SEC's $535 million settlement with Goldman Sachs with the proposed Citi arrangement, asserting that the Goldman case "involved a similar but arguably less egregious unbiased scenario.") The public, meanwhile, is left with unproven facts and inadequate remedy, according to Rakoff. "How can it ever be reasonable to impose substantial relief on the basis of absolute allegations?" he wrote. "It is not fair because, despite Citigroup's nominal approval, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged is control. ... And, most obviously, the proposed consent judgment does not serve the acknowledged interest because it asks the court to employ its power and assert its authority when it does not recall the facts." (Interestingly, the plaintiffs firm Robbins Geller Rudman & Dowd filed a proposed amicus outline asking Rakoff to reject the deal for that very reason.)

Rakoff's ruling suggests that he's not pleased to approve a deal without an admission of wrongdoing from Citi. "The court, and the public, extremity some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the foundation of unknown facts, while the public is deprived of ever knowing the truth in a matter of apparent public importance," he wrote. But as Andrew Longstreth has reported for On the Case, there are sure costs to the public if the SEC demands terms defendants simply won't agree to.

That was kernel of the SEC's response to Rakoff's ruling Monday. "The court's criticism that the settlement does not ask for an 'admission' to wrongful conduct disregards the fact that obtaining disgorgement, numismatic penalties, and mandatory business reforms may significantly outweigh the absence of an access when that relief is obtained promptly and without the risks, delay, and resources required at pain in the neck," enforcement director Robert Khuzami said in a statement. "It also ignores decades of established conduct throughout federal agencies and decisions of the federal courts. Refusing an otherwise advantageous satisfaction solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the advance of losses suffered by other investors not before the court."

The agency didn't respond to my determined question about why it filed the proposed Citi deal in Manhattan rather than in Washington.

Citi judgement Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison didn't carry back a call for comment.

Source: Thomson Reuters News & Insight