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Judge Rakoff Rejects SEC Settlement with Citicorp

Finally a US District Judge comes down hard on the cowards at the SEC for again promoting a settlement with no admission of guilt by the banksters.  Judge Jed Rakoff of the Southern District of New York says in the opinion:

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 says that the legal standard is whether the settlement is fair, reasonable, adequate and in the public interest, the legal standard put forward by the SEC in its motion for approval of the settlement. In a subsequent pleading, the SEC says that the public interest is not part of the standard. Judge Rakoff flatly rejects this view. The fall back position of the SEC is that it is the sole arbiter of the public interest. No it isn’t, says the Judge.

The SEC’s allegations are strong. In the case against an individual employee of Citicorp, the SEC asserts that “Citicorp knew that it would be difficult to place the [securities] if it disclosed to investors its intention to use the vehicle to short a hand-picked set of [poorly rated assets]”. It also knew that it would be easier to sell if it said that the assets were selected by an experienced third party, so it did. Of course, those are just allegations, and are not a basis for judicial action; especially when Citicorp neither admits nor denies them, and specifically told the Court it intended to deny them in other proceedings. The SEC only charged Citicorp with negligence. That may be the contrivance Judge Rakoff calls out.

The SEC argues that even though Citicorp neither admits nor denies the facts, the public will somehow know the truth. The Court says that allegations are just talk: they have neither evidentiary value nor collateral estoppel effect. The actual effect of the settlement is that Citicorp pays a comparatively small fine, and leaves the issue of truth up in the air. The settlement serves the interests of the parties. Citicorp treats the fine as the cost of doing business and maintaining relations with a regulator. It isn’t clear to the Court what the SEC gets out of the settlement, besides a “quick headline.” The order doesn’t even require the SEC to use the $285 million it gets to pay down the investors’ losses of $700 million.

It isn’t uncommon for a written opinion rejecting a settlement to point the parties at a solution. That is not this case. Presumably the SEC can agree to devote the $285 million to a partial repayment of the losses of investors. And, perhaps it could drop the pointless injunction, which it never enforces anyway; that would undercut the Court’s opinion as to whether the public interest was satisfied by the settlement.

However, the Court consolidated the Citicorp case with the case against the individual. That forces the SEC to deal directly with the strong allegations against Citicorp (that it had actual knowledge of the fraud), which I hope makes it harder for the SEC to keep hiding behind the pointless “neither admits nor denies” language.

Maybe this time his harsh language will put some steel in the spines of the SEC’s lawyers. They need it.

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