Rakoff to SEC: Oh yes, it is my job to consider public interest

November 29, 2011

In 2010, when the Securities and Exchange Commission brought a case against Citigroup for misleading investors about the bank’s exposure to subprime mortgages, the SEC filed the proposed $75 million settlement in Washington, D.C., federal court. Judge Ellen Huvelle gave the agency some gruff about the deal, in which two individual Citi defendants also settled SEC claims through an administrative action, but she eventually accepted the settlement without demanding any big changes.

The SEC and Citi must be looking back with regret at those halcyon days. For reasons the agency has not explained, when it filed a proposed $285 million settlement with Citi last month, it opted for the federal court not in D.C. but in Manhattan. There, the case — which involves claims that Citi defrauded investors in a mortgage-backed CDO — was randomly assigned to U.S. District Judge Jed Rakoff, who has recently been engaged in a highly-publicized campaign of insisting on corporate accountability in SEC settlements. The SEC proceeded to undermine its credibility in Rakoff’s court by arguing, as my colleague Erin Geiger Smith reported, that it’s not the judge’s role to consider the public interest in SEC settlements.

In a 15-page, eminently quotable exercise in rhetoric issued Monday, Rakoff pushed the agency into the grave it dug for itself, rejecting not only the proposed settlement but also the SEC’s assertion that he must heed its assessment of the public interest. “A court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest,” Rakoff wrote. “Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensible attribute of the federal judiciary.”

Rakoff took particular issue with the SEC’s standard operating procedure of permitting a defendant to settle claims without admitting to underlying allegations, describing the agency’s strategy as “hallowed by history but not by reason.” The SEC asserted that because Citi did not expressly deny its allegations the judge and the public could infer their truth. “This is wrong as a matter of law and unpersuasive as a matter of fact,” Rakoff wrote, adding later in the ruling, “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts — cold, hard, solid facts, established either by admission or by trials — it serves no lawful or moral purpose and is simply an engine of oppression.”

The proposed settlement, the judge said, offered an obvious benefit only to Citi; Rakoff wrote that it is “harder to discern” what the SEC gets from the agreement “other than a quick headline.” (He contrasted the terms of the SEC’s $535 million settlement with Goldman Sachs with the proposed Citi deal, asserting that the Goldman case “involved a similar but arguably less egregious factual scenario.”) The public, meanwhile, is left with unproven facts and inadequate relief, according to Rakoff. “How can it ever be reasonable to impose substantial relief on the basis of mere allegations?” he wrote. “It is not fair because, despite Citigroup’s nominal consent, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged is patent. … And, most obviously, the proposed consent judgment does not serve the public interest because it asks the court to employ its power and assert its authority when it does not know the facts.” (Interestingly, the plaintiffs firm Robbins Geller Rudman & Dowd filed a proposed amicus brief asking Rakoff to reject the deal for that very reason.)

Rakoff’s ruling suggests that he’s not willing to approve a deal without an admission of wrongdoing from Citi. “The court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance,” he wrote. But as Andrew Longstreth has reported for On the Case, there are clear costs to the public if the SEC demands terms defendants simply won’t agree to.

That was substance of the SEC’s response to Rakoff’s ruling Monday. “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,” enforcement director Robert Khuzami said in a statement. “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.”

The agency didn’t respond to my specific question about why it filed the proposed Citi deal in Manhattan rather than in Washington.

Citi counsel Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison didn’t return a call for comment.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Intentional fraud is wrongdoing – as corporations lobbied to be treated as people, the core people responsible for this wrongdoing, belong behind bars.

Public at large owes good bit of gratitude to this courageous soul.

Posted by Mott | Report as abusive

Out of court settlements can be used two ways. They can be used as the SEC tried to do with Citicorp or they can be used to make false claims by a government agency against a private person or business and then settle for an out of court settlement as the less grueling and expensive option. It becomes a government run extortion racket when that happens and I met a small business owner who received national attention when it happened to him. People might remember the case of Jim Knott on 60 minutes several years ago.

Good for Judge Rakoff.

Posted by paintcan | Report as abusive

It is time that the Judaical system stood up these big corporations. SEC things they are to big to fail along with Citi Corp. Thanks Judge Rakoff for standing up for the people.

Posted by Susanbsbi | Report as abusive

The US government needs to be re-booted.

Posted by tmc | Report as abusive

When a Judge takes the time to express what, the pulse of america is thinking, and quite tried of. It stands to reason, that the verbal gymnastic need to be exposed for what it is.
How long must the public mindset be represented by sooth sayers, who are more than likely in bed with the decievers.
We are in a world recession/depression, and people like Citi put us there. billions of peoples lives have been irrevocably changed for the worse, and it is quite obvious, that this was a well thought out plan, very intentional.
God bless the soul who stands up for the way the truth and the life.

Posted by fiigtree1 | Report as abusive

I guess Citi paid for a particularly fine lunch during settlement negotiations and also offered up some fine cigars. Sounds like an awfully clubby relationship.

Posted by vh070 | Report as abusive

For all those feeling self-righteous that the SEC got the public embarassment it deserves, consider for a moment that Congress – our representatives – often severely underfunds the SEC (and other regulatory agencies, most recently the CFTC) and puts them in a position of weakness in enforcement cases because corporations know they do not have the resources to do a full investigation. SEC is left to take the best deal on offer.

Posted by KnightPC | Report as abusive

My compliments and gratitude to Ms. Frankel for this article and to Judge Jed Rakoff for standing up for “we, the people”.

For all too long the “public interest” has been misinterpreted as being “we, the bureaucracy” or “we, the connected”. It is utterly refreshing to find there are still those wearing the robes who believe a government of laws superior to a government of men (all too corruptible).

Posted by OneOfTheSheep | Report as abusive

Here is the mission statement from the Enforcement Manual published by the “Securities and Exchange Commission Division of Enforcement”:


Mission Statement

The Division’s mission is to protect investors and the markets by investigating potential violations of the federal securities laws and litigating the SEC’s enforcement actions. Values integral to that mission are:
• Integrity: acting honestly, forthrightly, and impartially in every aspect of our work.
• Fairness: assuring that everyone receives fair and respectful treatment, without regard to wealth, social standing, publicity, politics, or personal characteristics.
• Passion: recognizing the importance of and caring deeply about our mission of protecting investors and markets.
• Teamwork: supporting and cooperating with colleagues and other Divisions and Offices at the SEC and fellow law enforcement professionals.

I doubt that anyone at the SEC over the past decade has ever actually read this mission statement. Surely, if they had, they would hang their heads in shame and tender their resignations en masse.

Everyone who is charged with oversight of the SEC should be equally ashamed. My compliments and gratitude to Ms. Frankel and to Judge Jed Rakoff, as well. It falls far short of a RICO prosecution, but it’s a start.

Posted by breezinthru | Report as abusive

The whole problem is that neither DOJ and agency attorneys have law degrees, but they are not litigators. They only want those cases that are basically walk ons and are intimidated by true litigators that a high profile defendant will obtain. They really are only interested in the quickie headline and be able to stand before the press in groups of 5 or 10 and make some announcement for the 5 minutes of fame.
Next time you see some announcer proclaiming great “conclusion” of a case ask yourself who are all those bozos standing up there and what did they do other than go get the coffee.

Posted by CMEBARK | Report as abusive


The same happened to me, although thankfully it hasn’t garnered national attention.

Posted by Grinder74 | Report as abusive


Which is why they are ruthless in extracting disgorgement and penalties from small operators and individuals–those who can’t compete against the unlimited resources of the government. We need more Judge Rakoff’s, but they need to turn their attention to the little guy who’s being extorted by the SEC.

Posted by Grinder74 | Report as abusive

“• Fairness: assuring that everyone receives fair and respectful treatment, without regard to wealth, social standing, publicity, politics, or personal characteristics.”

ROFLMAO all day.

Posted by Grinder74 | Report as abusive