Finally. A federal judge with a distinctly ninety nine percenter's view From today NYT:
Judge Blocks Citigroup Settlement With S.E.C.
By EDWARD WYATT
WASHINGTON — Taking a broad swipe at the Securities and Exchange Commission’s practice of allowing companies to settle cases without admitting that they had done anything wrong, a federal judge on Monday rejected a $285 million settlement between Citigroup and the agency.
The judge, Jed S. Rakoff of United States District Court in Manhattan, said that he could not determine whether the agency’s settlement with Citigroup was “fair, reasonable, adequate and in the public interest,” as required by law, because the agency had claimed, but had not proved, that Citigroup committed fraud.
As it has in recent cases involving Bank of America, JPMorgan Chase, UBS and others, the agency proposed to settle the case by levying a fine on Citigroup and allowing it to neither admit nor deny the agency’s findings. Such settlements require approval by a federal judge.
While other judges are not obligated to follow Judge Rakoff’s opinion, the 15-page ruling could severely undermine the agency’s enforcement efforts if it eventually blocks the agency from settling cases in which the defendant does not admit the charges.
The agency contends that it must settle most of the cases it brings because it does not have the money or the staff to battle deep-pocketed Wall Street firms in court. Wall Street firms will rarely admit wrongdoing, the agency says, because that can be used against them in investor lawsuits.
The agency in particular, Judge Rakoff argued, “has a duty, inherent in its statutory mission, to see that the truth emerges.” But it is difficult to tell what the agency is getting from this settlement “other than a quick headline.” Even a $285 million settlement, he said, “is pocket change to any entity as large as Citigroup,” and often viewed by Wall Street firms “as a cost of doing business.”
According to the Securities and Exchange Commission, Citigroup stuffed a $1 billion mortgage fund that it sold to investors in 2007 with securities that it believed would fail so that it could bet against its customers and profit when values declined. The fraud, the agency said, was in Citigroup’s falsely telling investors that an independent party was choosing the portfolio’s investments. Citigroup made $160 million from the deal and investors lost $700 million.
Judge Rakoff said the agency settlement policy — “hallowed by history, but not by reason”— creates substantial potential for abuse because “it asks the court to employ its power and assert its authority when it does not know the facts.” That undermines the constitutional separation of powers, he said, by asking the judiciary to rubber-stamp the executive branch’s interpretation of the law.
The agency said that it disagreed with the judge’s ruling but did not say whether it would appeal, or try to refashion the settlement or prepare to begin a trial, as the judge directed, on July 16.
Robert Khuzami, the agency’s director of enforcement, said in a statement that the Citigroup settlement “reasonably reflects the scope of relief that would be obtained after a successful trial,” and that the decision “ignores decades of established practice throughout federal agencies and decisions of the federal courts.”
Citigroup said it also disagreed with Judge Rakoff’s decision, adding that it would fight the charges if the case indeed went to trial.
“We believe the proposed settlement is a fair and reasonable resolution to the S.E.C.’s allegation of negligence, which relates to a five-year-old transaction,” Edward Skyler, a Citigroup spokesman, said in a statement. “We also believe the settlement fully complies with long-established legal standards. In the event the case is tried, we would present substantial factual and legal defenses to the charges.”
In his decision, Judge Rakoff called Citigroup “a recidivist,” or repeat offender, for having previously settled other fraud cases with the agency where it neither admitted nor denied the allegations but agreed never to violate the law in the future.
Citigroup and other repeat offenders can agree to those terms, the judge said, because they know that the commission has not monitored compliance, failing to bring contempt charges for repeat violations in at least 10 years.
A recent analysis by The New York Times of the agency’s fraud settlements with Wall Street firms found 51 instances, involving 19 companies, in which the agency claimed that a company had broken fraud laws that they previously had agreed never to breach. Securities law experts said that the ruling presents the agency with a tough dilemma. In future cases, it will have to consider the risk that another judge may be reluctant to approve a settlement given the Rakoff ruling.
“This is clearly a case of great significance,” said Harvey Pitt, a former chairman of the agency who is now chief executive at Kalorama Partners in Washington. “It’s also a case for which there is no direct precedent. Courts have been approving settlements by government agencies without any admissions of wrongdoing for years.”
On the other hand, Mr. Pitt noted, “there is no suggestion here that this decision would apply in every single case,” because Citigroup has reached such settlements before, a situation that sets this case apart from many Securities and Exchange Commission settlements.
Judge Rakoff has been a frequent critic of the agency’s settlements. In 2009, he rejected a proposed $33 million settlement with Bank of America for a case in which the agency said the bank had misled shareholders over its acquisition of Merrill Lynch. He eventually approved a $150 million settlement after the agency presented further evidence of the bank’s wrongdoing.
The judge also noted the difference between the agency’s settlement with Citigroup and its settlement last year with Goldman Sachs in a similar mortgage-derivatives case. Goldman was required to say that its marketing materials for the product “contained incomplete information.”
In the Citigroup case, no such facts were agreed on. “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” Judge Rakoff wrote. “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.”
Mr. Khuzami took issue with the judge’s characterization of the settlement. “These are not ‘mere’ allegations,” he said, “but the reasoned conclusions of the federal agency responsible for the enforcement of the securities laws after a thorough and careful investigation of the facts.”
Barbara Black, a professor at the University of Cincinnati College of Law who edits the Securities Law Prof Blog, said that the decision was interesting because Judge Rakoff carefully treads the line between the deference that judges are supposed to show to regulatory agencies while also ensuring that the court does not simply rubber-stamp decisions.
In a legal dispute between two private parties, they can agree to whatever settlement they desire, Ms. Black said. But in a case involving a public agency with consequences that affect the public interest, there has to be some kind of acknowledgment that certain things did occur, she added.
Judge Blocks Citigroup Settlement With S.E.C.
By EDWARD WYATT
WASHINGTON — Taking a broad swipe at the Securities and Exchange Commission’s practice of allowing companies to settle cases without admitting that they had done anything wrong, a federal judge on Monday rejected a $285 million settlement between Citigroup and the agency.
The judge, Jed S. Rakoff of United States District Court in Manhattan, said that he could not determine whether the agency’s settlement with Citigroup was “fair, reasonable, adequate and in the public interest,” as required by law, because the agency had claimed, but had not proved, that Citigroup committed fraud.
As it has in recent cases involving Bank of America, JPMorgan Chase, UBS and others, the agency proposed to settle the case by levying a fine on Citigroup and allowing it to neither admit nor deny the agency’s findings. Such settlements require approval by a federal judge.
While other judges are not obligated to follow Judge Rakoff’s opinion, the 15-page ruling could severely undermine the agency’s enforcement efforts if it eventually blocks the agency from settling cases in which the defendant does not admit the charges.
The agency contends that it must settle most of the cases it brings because it does not have the money or the staff to battle deep-pocketed Wall Street firms in court. Wall Street firms will rarely admit wrongdoing, the agency says, because that can be used against them in investor lawsuits.
The agency in particular, Judge Rakoff argued, “has a duty, inherent in its statutory mission, to see that the truth emerges.” But it is difficult to tell what the agency is getting from this settlement “other than a quick headline.” Even a $285 million settlement, he said, “is pocket change to any entity as large as Citigroup,” and often viewed by Wall Street firms “as a cost of doing business.”
According to the Securities and Exchange Commission, Citigroup stuffed a $1 billion mortgage fund that it sold to investors in 2007 with securities that it believed would fail so that it could bet against its customers and profit when values declined. The fraud, the agency said, was in Citigroup’s falsely telling investors that an independent party was choosing the portfolio’s investments. Citigroup made $160 million from the deal and investors lost $700 million.
Judge Rakoff said the agency settlement policy — “hallowed by history, but not by reason”— creates substantial potential for abuse because “it asks the court to employ its power and assert its authority when it does not know the facts.” That undermines the constitutional separation of powers, he said, by asking the judiciary to rubber-stamp the executive branch’s interpretation of the law.
The agency said that it disagreed with the judge’s ruling but did not say whether it would appeal, or try to refashion the settlement or prepare to begin a trial, as the judge directed, on July 16.
Robert Khuzami, the agency’s director of enforcement, said in a statement that the Citigroup settlement “reasonably reflects the scope of relief that would be obtained after a successful trial,” and that the decision “ignores decades of established practice throughout federal agencies and decisions of the federal courts.”
Citigroup said it also disagreed with Judge Rakoff’s decision, adding that it would fight the charges if the case indeed went to trial.
“We believe the proposed settlement is a fair and reasonable resolution to the S.E.C.’s allegation of negligence, which relates to a five-year-old transaction,” Edward Skyler, a Citigroup spokesman, said in a statement. “We also believe the settlement fully complies with long-established legal standards. In the event the case is tried, we would present substantial factual and legal defenses to the charges.”
In his decision, Judge Rakoff called Citigroup “a recidivist,” or repeat offender, for having previously settled other fraud cases with the agency where it neither admitted nor denied the allegations but agreed never to violate the law in the future.
Citigroup and other repeat offenders can agree to those terms, the judge said, because they know that the commission has not monitored compliance, failing to bring contempt charges for repeat violations in at least 10 years.
A recent analysis by The New York Times of the agency’s fraud settlements with Wall Street firms found 51 instances, involving 19 companies, in which the agency claimed that a company had broken fraud laws that they previously had agreed never to breach. Securities law experts said that the ruling presents the agency with a tough dilemma. In future cases, it will have to consider the risk that another judge may be reluctant to approve a settlement given the Rakoff ruling.
“This is clearly a case of great significance,” said Harvey Pitt, a former chairman of the agency who is now chief executive at Kalorama Partners in Washington. “It’s also a case for which there is no direct precedent. Courts have been approving settlements by government agencies without any admissions of wrongdoing for years.”
On the other hand, Mr. Pitt noted, “there is no suggestion here that this decision would apply in every single case,” because Citigroup has reached such settlements before, a situation that sets this case apart from many Securities and Exchange Commission settlements.
Judge Rakoff has been a frequent critic of the agency’s settlements. In 2009, he rejected a proposed $33 million settlement with Bank of America for a case in which the agency said the bank had misled shareholders over its acquisition of Merrill Lynch. He eventually approved a $150 million settlement after the agency presented further evidence of the bank’s wrongdoing.
The judge also noted the difference between the agency’s settlement with Citigroup and its settlement last year with Goldman Sachs in a similar mortgage-derivatives case. Goldman was required to say that its marketing materials for the product “contained incomplete information.”
In the Citigroup case, no such facts were agreed on. “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” Judge Rakoff wrote. “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.”
Mr. Khuzami took issue with the judge’s characterization of the settlement. “These are not ‘mere’ allegations,” he said, “but the reasoned conclusions of the federal agency responsible for the enforcement of the securities laws after a thorough and careful investigation of the facts.”
Barbara Black, a professor at the University of Cincinnati College of Law who edits the Securities Law Prof Blog, said that the decision was interesting because Judge Rakoff carefully treads the line between the deference that judges are supposed to show to regulatory agencies while also ensuring that the court does not simply rubber-stamp decisions.
In a legal dispute between two private parties, they can agree to whatever settlement they desire, Ms. Black said. But in a case involving a public agency with consequences that affect the public interest, there has to be some kind of acknowledgment that certain things did occur, she added.
