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.

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