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Outside the Box Archives | Email alerts
Nov. 30, 2011, 12:01 a.m. EST
By Sterling Wong
NEW YORK (MarketWatch) "” U.S. District Judge Jed Rakoff is renowned for his tough stance against Wall Street crimes.
This was the judge who ordered Galleon Group founder Raj Rajaratnam to pay a record $92.8 million penalty in a civil insider trading suit earlier this month, so it was not a surprise when the 68-year-old decided to strike down the $285 million settlement that the Securities and Exchange Commission had struck with Citigroup /quotes/zigman/5065548/quotes/nls/c C +7.07% over fraud investigations into the bank's mortgage-backed securities deals.
Rakoff ruled that the proposed settlement was "neither fair, nor adequate, nor in the public interest," adding that there was a public interest in uncovering the truth.
"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," the judge wrote.
"Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances."
The SEC defended the settlement it reached with the bank, with Robert Khuzami, director of the SEC's enforcement division.
A federal judge rejected a proposed settlement between the SEC and Citigroup over allegations the bank misled investors in a mortgage-bond transaction, David Reilly reports on Markets Hub. Photo: Getty Images.
"The court's criticism that the settlement does not require an "?admission' to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial. It also ignores decades of established practice throughout federal agencies and decisions of the federal courts. Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court."
Rakoff's ruling is likely to have far-reaching ramifications on Wall Street and at the SEC. The consent judgment settlement reached between Citi and the regulatory body, in which Citi had the ability to neither admit to any wrongdoing nor deny the allegations held against it, was a common one that the SEC typically reached with firms that it accused of wrongdoing.
For example, in a similar mortgage securities fraud case in July last year, Goldman Sachs Group Inc. /quotes/zigman/188479/quotes/nls/gs GS +6.23% reached a $550 million settlement with the SEC after the agency had sued the investment bank for fraud linked to its Abacus mortgage security. While Goldman accepted that it had given incomplete information about its Abacus security to investors, it did not admit any wrongdoing.
If Rakoff's ruling proves to be popular in the public sphere, then it is possible that other judges might start scrutinizing settlements between the SEC and Wall Street firms more closely, and the SEC would also be compelled to be stricter in its discipline of firms who flout rules.
As Adam Sorensen of Time magazine notes:
Three wealth managers from Greenwich, Conn. have won a $254.2 million Powerball jackpot, the biggest in Connecticut lottery history. Shelly Banjo has details on Lunch Break.
"Rakoff's ruling is one small dose of exactly what Wall Street's critics have been hankering for. The conflict between New York Attorney General Eric Schneiderman (along with Beau Biden, Martha Coakley and Kamala Harris) and lead negotiators of the 50-state mortgage fraud settlement (including the other state AGs and the Obama administration) is basically over whether securitization fraud cases will get swept under the rug. And you'd be hard pressed to find a realistic outcome more appealing to protesters hoisting "?Jail the Banksters' signs in Zuccotti Park than a public fraud trial for a major Wall Street institution and a rebuke to what Occupiers see as an overly sympathetic federal government. Judge Rakoff just gave them both of those things." Read more of Sorensen's comments in Time.
That being said, it is still unlikely that the facts of the Citi fraud case will be uncovered, even though a trial date of July 16, 2012 has been set.
In 2009, the SEC sued Bank of America /quotes/zigman/190927/quotes/nls/bac BAC +4.93% , claiming that the bank had lied to shareholders about bonuses paid out to Merrill Lynch executives when it sought approval to acquire the troubled firm. The agency reached a $33 million settlement, which Rakoff first rejected. However, the judge later relented and approved a $150 million settlement in February 2010, even though he said the agreement was "half-baked justice at best."
If history is to repeat itself, what will probably happen is that the SEC will increase the penalty Citi has to pay "” perhaps an amount closer to the $550 million Goldman coughed up "” and Rakoff will approve the new settlement.
Then again, populist anger toward big banks has grown since the SEC-Bank of America settlement last year, as exemplified by the nationwide Occupy movement, and perhaps Rakoff, augmented by the pro-transparency public sentiment and a growing public profile as a take-no-nonsense judge, will insist on holding the SEC and Citi accountable to the public this time around.
Sterling Wong is a Minyanville staff writer.
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