Law Blog Expert Panel: Ex-Federal Judges on Rakoff's Rejection of Citi Pact - Law Blog - WSJ

Three judges weigh in on Judge Rakoff's rejection of the settlement between SEC and Citigroup.  Following the WSJ's idea of balance they are: 1) Wrong.  2) Understandable but problematic (better left to legislative processes).  3) Within the judge's discretion under the Federal Rules of Civil Procedure, R. 23.
Law Blog Expert Panel: Ex-Federal Judges on Rakoff's Rejection of Citi Pact - Law Blog - WSJ:
A fourth approach is the laudatory one taken by the New Jersey Law Journal Editorial Board:

The Securities and Exchange Commission is tasked with the responsibility to investigate unlawful conduct of corporate America. If it is determined that regulated businesses have engaged in unlawful activity that has caused or contributed to the current depressed national economy, then they have a job to do.On Oct. 19, the SEC filed two lawsuits in the Southern District of New York: one accusing Citigroup Global Markets Inc. of a substantial securities fraud and the other accusing an identified employee of involvement in that fraud. Based on four years of accumulated information, the SEC asserted that in early 2007, when the market for mortgage-backed securities was beginning to weaken, Citigroup created a billion-dollar fund that allowed it to dump questionable assets on misinformed investors by representing that the fund's assets were attractive investments. Citigroup included within the portfolio a substantial percentage of negatively projected assets and had taken a short position in the very assets that it helped select, the SEC contended.

While the suit against Citigroup alleged negligence, the suit against the individual employee set forth that Citigroup actually knew that placing the liabilities of the fund would be difficult if it disclosed to potential investors its intention to use the fund to short a hand-picked set of poorly rated assets.Contemporaneously with the filing of those complaints, the SEC presented to District Judge Jed Rakoff a proposed consent judgment, represented to be the settlement between the SEC and Citigroup, not the individual employee.

The economic terms of the settlement were that Citigroup was to disgorge $160 million in net profits realized from the transaction, plus $30 million in interest, and to pay a civil penalty of $95 million, for a total of $285 million. When put into perspective, this sum of money is very small. Citigroup made a $3.8 billion profit in the third quarter of 2011 alone. The investors, meanwhile, lost more than $700 million.

The settlement provided that Citigroup would neither admit nor deny any of the allegations of the complaint and was enjoined from violating the securities law in the future.Private parties have the right to enter into settlement agreements, whether or not they are fair and reasonable. But Rakoff refused to approve this settlement between a governmental agency and a regulated corporation without being provided any proven or admitted facts upon which he could exercise some independent judgment.***

It appears to have been the government's and Citigroup's intention to walk into court and have their agreement rubber-stamped. Rakoff recognized that substantial deference was due the SEC but correctly observed that he had to exercise independent judgment to determine the settlement to be fair, reasonable, adequate and in the public interest. The government took the extraordinary position that the SEC is the sole determiner of what is in the public interest regarding consent judgments in its cases. But as Rakoff pointed out, that is not the law.

Rakoff needed some knowledge of the underlying facts to avoid being a "mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance." He was critical of a consent agreement wherein there was no admission of the underlying allegations. Not only did the settlement bring no benefit to the defrauded investors; the consent judgment would have absolutely no evidentiary value in any claim or suit an investor might thereafter lodge.

Many judges would have acquiesced and approved the settlement. The SEC claims it is devoted to the protection of the investors as well as to assisting them in the recovery of their losses. That appeared a fiction to Rakoff, who stated that "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." Instead of approving the consent judgment, he consolidated both cases for trial next July.Rakoff's decision underscores the need for an independent judiciary. Our compliments to the court.

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