The Securities and Exchange Commission, Citigroup, Wall Street, the big banks, and the vast majority of the corporate crime defense bar are all in a case on the same side in what has been billed as “the corporate crime fight of the century.” Having this group together and on the same side is newsworthy in itself. On the other side of the suit – all alone – had been U.S. District Court Judge Jed Rakoff. But that is changing. The Second Circuit Court of Appeals appointed Rusty Wing, a partner in the New York City firm of Lanker Siffert & Wohl, to brief the case because both the SEC and Citigroup were taking the same side on the issue. Then – sort of like the cavalry – along came a team of 19 securities law professors including University of Cincinnati Law Professor Barbara Black, Columbia Law Professor John Coffee, Cornell Law Professor Lynn Stout, and Duke Law Professor James Cox, to join Judge Rakoff and the court-appointed lawyer.
To put things in perspective, let’s take a look at what brought this about. Last year, Judge Rakoff rejected a proposed settlement between the Securities and Exchange Commission and Citigroup, ruling that the settlement was “neither reasonable, nor fair, nor adequate, nor in the public interest.” Earlier this year, the Second Circuit rebuked Judge Rakoff, saying that “it is not the proper function of federal courts to dictate policy to executive administrative agencies.”
It was pointed out in a brief by Rusty Wing, a veteran and well-respected lawyer, that the proposed $95 million penalty against Citigroup was “a small fraction of the $535 million penalty imposed for very similar conduct in the Goldman case, and the proposed penalty was based on Citigroup’s purported net profit, not the allowable gross revenue noticeably missing from the complaint.” The team of law professors have concerns about the SEC’s “practice of settling enforcement actions alleging serious fraud without any acknowledgment of facts, on the basis of a pro forma obey the law injunction, a commitment to undertake modest remedial measures and insubstantial financial penalties.” The professors added:
The prevalence of this practice is precisely why federal district courts must have discretion, when reviewing consent judgments between a government agency and a private party that include an injunction, to take into account the public interest.
They argued that the question before the Second Circuit is whether Judge Rakoff “may refuse to approve a proposed consent judgment in an SEC enforcement action when the parties do not provide the court with information to assess the strength of the agency’s allegations against the defendant.” It was pointed out in the brief that Judge Rakoff said he couldn’t approve the SEC settlement with Citigroup because he was not provided “with any proven or admitted facts with which to exercise even a modest degree of independent judgment.” That surely seems to me like he did the right thing.
Had Judge Rakoff approved the settlement without information to exercise its own independent judgment “the court would become a rubber stamp for the agency,” the law professors wrote. They added that the SEC’s settlement with Citigroup was representative of a recurring problem – the SEC files a complaint “alleging serious securities fraud, while simultaneously filing a proposed consent judgment with modest financial penalties, a pro forma ‘obey the law’ injunction against future violations, an undertaking to implement inexpensive remedial measures that appear to be window-dressing and no acknowledged facts.”
The law professor team was correct in its belief that corporations like Citigroup treat settlements as a “cost of doing business.” The team was also correct that “the SEC’s position effectively leaves no place for judicial review.” When Judge Rakoff asked Citigroup’s lawyer whether his client admitted the allegations, he responded: “We do not admit the allegations, your Honor. But if it’s any consolation, we do not deny them.” That was a most interesting response. I agree with the positions taken by the 19 law professors. Without adequate information to justify approval, I believe Judge Rakoff acted within his discretion in refusing to approve the proposed settlement.
Source: Corporate Crime Reporter
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