Chief judge: Rakoff assignment to Citi case was ‘totally random’

November 30, 2011

If there’s one federal jurist the Securities and Exchange Commission absolutely, positively did not want to see at the top of the docket in its $285 million settlement with Citigroup, it was Senior Judge Jed Rakoff of Manhattan federal court. Rakoff has been a festering sore for the agency since 2009, when he rejected a proposed $33 million settlement with Bank of America over failing to disclose bonus payments to Merrill Lynch executives in merger-related documents. In a March 2011 opinion in the Vitesse Semiconductor case, Rakoff took the agency to task for agreeing to settlements in which defendants neither admit nor deny wrongdoing. Then in July he claimed jurisdiction over the SEC’s case against former Goldman Sachs director Rajit Gupta, accusing the agency of forum shopping in filing an administrative action against Gupta. You can only imagine the teeth-gnashing at the SEC when Rakoff was assigned the Citi case. After the SEC tried to argue that Rakoff doesn’t have the power to consider the public interest in his evaluation of the proposed settlement, Monday’s rejection of the settlement was practically a foregone conclusion.

So you may be wondering — as I was — how it is that Rakoff ended up with the Citi case. The answer, according to his chambers and Chief Judge Loretta Preska of the Southern District, is that the assignment was purely random. Yes, there are 41 federal district judges in the district, so the odds of any of them overseeing multiple, unrelated cases filed by the same plaintiff are long. But according to Preska and Rakoff’s chambers, that’s what happened here.

The SEC filed the Citigroup case in federal court in Manhattan, rather than Washington, D.C. (where it filed a $75 million settlement with Citi in 2010) because the new Citi case includes SEC charges against Brian Stoker, a Citi Global Markets employee who allegedly structured and marketed the CDO that’s at the bottom of the case. Unlike the two Citi employees in the 2010 case, Stoker refused to settle with the agency. So in anticipation of litigation with him, the agency filed the entire Citi case in New York.

Once it was filed, it went into what’s known in the Southern Distrrict as “the wheel.” Preska said there are actually different wheels for each category of civil suit, but each active judge is equally represented on each wheel. (They’re also not actual wheels, but electronic simulations.) Rakoff is a senior judge, which means he can pick and choose which civil wheels he’s on. But like many of the judges who recently took senior status in the Southern District, he’s still on all of the civil wheels. He’s no more likely than any other judge in the district, in other words, to be assigned any particular case.

“It’s wholly random,” Preska told me. “There is no under-the-table nothing.” Rakoff’s chambers confirmed that both the BofA and Citi cases were assigned to the judge by random.

The Gupta case was a somewhat different matter. Under the Southern District’s rules, criminal cases and SEC enforcement actions “arising from the same alleged fraud” are assigned to the same judge. So once Rakoff was assigned the Galleon insider trading cases, the SEC’s Gupta action was considered related. (Lawyers in civil cases in Manhattan federal court can also indicate that new complaints are related to pending cases, which, as I’ve explained, is how Rakoff came to oversee so much of the district court litigation related to the Bernard Madoff liquidation.)

And before we get caught up in alternative conspiracy theories about how Rakoff got the Citi case, we should remember that the SEC’s litigation with BofA and Citi stand out mainly for the way Rakoff handled those cases. Rakoff wasn’t assigned the agency’s $535 million settlement with Goldman Sachs, which was approved by U.S. District Judge Barbara Jones of Manhattan federal court, nor the SEC’s $154 million deal with JPMorgan Chase, which got a green light from Manhattan federal judge Richard Berman in June 2011.

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