November 29th, 2011
Econintersect: Our readers know federal judge Jed S. Rakoff (pictured) of United States District Court in Manhattan, as the man who has issued rulings slowing the progress of Madoff resolution trustee Irving Picard by curtailing the size of clawbacks from Madoff clients who successfully withdrew funds before the collapse in order to share those funds with those who lost everything. Rakoff has now thrown a monkey wrench into Citigroup’s sweetheart deal with the SEC (Securities and Exchange Commission) that settled charges of security fraud involving mortgage backed securities.
Rakoff ruled that the S.E.C.’s $285 million settlement, announced last month, is “neither fair, nor reasonable, nor adequate, nor in the public interest” because it does not provide the court with evidence on which to judge the settlement. This places in doubt the ability of the SEC to continue its practice of settling charges against Wall Street firms out of court and allowing them to escape without admitting any wrong doing.
Settlements are reached that often involve three clauses:
- The defendant admits no guilt;
- The defendant agrees not to deny guilt; and
- The defendant agrees not “to do it again”.
The New York Times sums thusly:
[Those] condition[s] gives a company or individual an advantage in subsequent civil litigation for damages, because cases in which no facts are established cannot be used in evidence in other cases, like shareholder lawsuits seeking recovery of losses or damages.
The S.E.C.’s policy — “hallowed by history, but not by reason,” Judge Rakoff wrote — creates substantial potential for abuse, the judge said, because “it asks the court to employ its power and assert its authority when it does not know the facts.”
Judge Rakoff also refers at one point to Citigroup as “a recidivist,” or repeat offender, which has violated the antifraud provisions of the nation’s securities laws many times. The company knew that the S.E.C.’s proposed judgment – that it cease and desist from violating the antifraud laws – had not been enforced in at least 10 years, the judge wrote.
Editor’s questions: When will blatant disregard for the law end? Will Judge Rakoff be the catalyst that starts meaningful prosecution of financial system fraud?
Hat tip to Elliott Morss.