One small victory for limited government, one giant leap for entrenching investor and consumer fraud in our financial system.
That's how I read a U.S. appeals court’s determination yesterday that District Judge Jed S. Rakoff overstepped his authority in rejecting a settlement between Citigroup and the Securities and Exchange Commission.
The case centers around SEC allegations that Citigroup ripped off mortgage securities investors before the financial crisis by misrepresenting the underlying assets. As is its custom, the Commission ultimately agreed to a settlement in the case of SEC v. Citigroup Global Markets in which the bank would pay a fine—$285 million in this case—while neither admitting nor denying guilt.
To Citigroup the advantage of such a no-fault deal is that it wouldn't have to worry that an admission of wrongdoing would be used against it in a separate court of law by private securities or class action attorneys. The SEC has long argued that it has no choice but to toss out the lucre of neither-admit-or-deny clauses to win settlements. Without these clauses, the SEC's targets would refuse to settle and the agency’s litigation resources would quickly be stretched beyond the breaking point, it argues.
Rakoff, who works in the U.S. District Court for the Southern District of New York, threw a monkey wrench in this well-oiled legal machine last November when he rejected the terms of the Citi settlement in scathing fashion.
"Why is [no admission of liability] a sensible way to go instead of establishing what the facts are?" the judge asked the SEC. "Last time I checked, anyone can make an allegation."
Rakoff further indicated in his rejection that he believed the SEC, stinging from its somnambulism during the Bernie Madoff and Allen Stanford scandals, was looking for "a quick headline." Added the judge: "The proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest." He further ordered the SEC and Citi to prepare for a July 2012 trial, setting the stage for the appeal.
That, in turn, set the stage for the U.S. Court of Appeals for the Second Circuit's rejection of Rakoff's rejection. The appeals court said that in the absence of overwhelming evidence of wrongful conduct by the SEC, the judicial branch does not have the authority to override the decisions of a duly installed executive branch agency.
That's the part of the appeals court’s decision I, as a fervent advocate of limited government, like.
What galls me about the ruling is that it's likely to perpetuate a perverse situation. As The New York Times has incisively reported, the SEC has turned its legal settlements into just one more wrist-slap and cost of doing business for Citigroup and the rest of Wall Street.
I'm waiting for someone to bring up the SEC on charges of aiding and abetting financial fraud. How interesting it would be to see the way the SEC settled that one.
Neil Weinberg is the editor-in-chief of American Banker. The views expressed here are his own.