Judge Rakoff Gives the S.E.C. a Stern Talking To in Citigroup Smackdown

129080125 Judge Rakoff Gives the S.E.C. a Stern Talking To in Citigroup Smackdown

Vikram Pandit, CEO of Citigroup.

Yesterday, U.S. District Judge Jed Rakoff blocked a settlement between the S.E.C. and Citigroup, criticizing the S.E.C. for settling a case without proving the factual nature of its allegations and allowing the bank to pay a fine and admit no wrongdoing. His published opinion, which might provide some satisfactory morning reading to some of those New Yorkers enjoying “passive recreation” in Zuccotti Park, is scathing.

In the case, the S.E.C. claimed Citigroup had committed fraud by knowingly selling investors mortgage-backed securities the bank knew would tank but portrayed as sound. Investors lost $700 million in the deal, but the bank made a net profit of $160 million by offloading the assets. Under the terms of the settlement, Citigroup would pay a $285 million fine, some of which would possibly be returned to investors, and admit nothing. Judge Rakoff decided to draw a line.

Some highlights of his opinion:

..the Court has spent long hours trying to determine whether, in view of the substantial deference due the S.E.C. in matters of this kind, the Court can somehow approve this problematic Consent Judgment. In the end, the Court concludes that it cannot approve it, because the Court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment.

He goes on to opine:

Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes 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.

His conclusion is openly critical of the S.E.C.:

Finally, 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. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.


  1. Anonymous says:

    O sweet Jed o’ mine. Someone in gov’t enforcement needs to back this guy up. The Justice Dept. should be taking on these matters and pressing for criminal charges–we all know now the SEC has no inclination to properly fine its bedmates.

    And I have yet to see any convincing evidence whatsoever that Justice just couldn’t make a convincing case against the big banks. The real fear seems to be that Justice could make too many convincing cases –that the corruption is so systemic that prosecuting it would expose just what a house of cards all big banks have built, and that cleaning up the corruption might jeopardize our politicians’ chief funding sources.

    Well, not cleaning it up has already killed citizens’ sense of trust in banks and exposed a government on the take. Allowing this situation to rot further will eventually kill the economy and the nation.  Time to demand our regulators and enforcers and lawmakers grow a pair, Rakoff style.

  2. As far as those banksters go I say lets exchange those three piece suits and briefcases for a good pick a shovel a bucket and some pinstripes.