For the SEC and Citigroup, this case should have been a walk in the park.
The SEC charged Citigroup with misleading investors about the quality of mortgage backed security CDOs it was selling. Investors lost $700 million.
But the details of the case aren’t what makes this decision strange. It’s how the case will be handled that has now become strange.
These kinds of cases are usually ended with a settlement where the bank gets to neither confirm nor deny its guilt in the matter. The SEC then gets to say justice was served, and the bank gets a slap on the wrist because, technically, they weren’t ruled guilty anyway. In this case, that slap was $285 million.
But Judge Jed Rakoff is tired of banks and the SEC reaching settlements that are “neither fair, nor reasonable, nor adequate, nor in the public interest.” Last week he rejected the $285 million fine, and this week he handed down the decision that explains why.
The short reason is that he’s fighting mad, and thinks that these settlements sacrifice the truth and facts so that banks and the SEC can continue business as usual. All of this happens at the expense of the public.
Here are the best quotes (from his decision) to show it. You can read the full decision here.
First he takes aim at the SEC working in the interest of banks:
- Before anything else, he fires at the SEC for trying to change what constitutes as a fair ruling against Citigroup: “In its most recent filing in this case, however, the S.E.C. partly reverses its previous position and asserts that, while the Consent Judgment must still be shown to be fair, adequate, and reasonable, “the public interest … is not part of [the] applicable standard of judicial review.” SEC Mem. at 4 n. 1. This is erroneous…The Supreme Court has repeatedly made clear…that a court cannot grant the extraordinary remedy of injunctive relief without considering the public interest.”
- Even worse, he basically says the SEC is incapable of determining what is in the public interest anyway: “As a fall-back, the S.E.C. suggests that, if the public interest must be taken into account, the S.E.C. is the sole determiner of what is in the public interest in regard to Consent Judgments settling…That, again, is not the law. “
- In short, SEC, you’re not doing your job, and you’re using the Court to get out of doing it: “without multiplying examples, it is clear that before a court may employ its injunctive and contempt powers in support of an administrative settlement! it is required, even after giving substantial deference to the views of the administrative agency, to be satisfied that it (The Court) is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest… the S.E.C.’s long-standing policy… of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact. There is little real doubt that Citigroup contests the factual allegations of the Complaint.
Then he gets to the heart of the issue: what both parties get out of settling this way:
- “Of course, the policy of accepting settlements without any admissions serves various narrow interests of the parties. In this case, for example, Citigroup was able, without admitting anything, to negotiate a settlement that (a) charges it only with negligence, (b) results in a very modest penalty, (c) imposes the kind of injunctive relief that Citigroup (a recidivist) knew that the S.E.C. had not sought to enforce against any financial institution for at least the last 10 years… (d) imposes relatively inexpensive prophylactic measures for the next three years. In exchange, Citigroup not only settles what it states was a broad- ranging four-year investigation by the S.E.C. of Citigroup’s mortgage-backed securities offerings… but also avoids any investors’ relying in any respect on the S.E.C. Consent Judgment in seeking return of their losses. If the allegations of the Complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business.”
Bottom line (to Rakoff) this settlement offers no facts, and no truth to the public:
- “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.”