Judge in SEC’s Bear Stearns case catches Rakoff fever

By Alison Frankel
February 15, 2012

U.S. District Judge Frederic Block of Brooklyn federal court will probably, in the end, approve a $1 million settlement between the Securities and Exchange Commission and former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin. He said as much in open court Monday, presiding over a settlement hearing rather than the civil trial scheduled to begin that day. But for everyone except Cioffi, Tannin, and their lawyers, the real story at Monday’s hearing was Block’s stream-of-consciousness musings on the appropriate role of a judge overseeing an SEC case. If there was any doubt that U.S. Senior District Judge Jed Rakoff has inspired soul-searching in the nation’s federal judiciary, the utterly compelling transcript of the hearing before Block should put it to rest. (My Reuters colleague Jessica Dye attended the hearing and sent me the transcript.)

Rakoff, as you’ll doubtless recall, last November rejected the SEC’s $285 million proposed settlement with Citigroup over an allegedly misleading mortgage-backed CDO. The Manhattan federal judge said he had to consider not only the interests of Citi and the SEC, but also the public interest in the settlement. “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 wrote.

Those are powerful words, and Rakoff’s Brooklyn colleague apparently heard them. “You allege [in the complaint] that [Cioffi and Tannin's] activity caused $1.8 billion of investors’ losses, and yet, when all is said and done, this case is being settled for — relatively speaking — chump change,” Block said to the SEC’s John Worland. “I think there’s a public interest in all of these things.”

Block first called on both SEC and defense lawyers — Hughes Hubbard & Reed for Cioffi; Brune & Richard for Tannin — to explain why the settlement was finalized only on the verge of trial. (He was irritated that he’d cleared three weeks on his calendar.) More fundamentally, though, he asked how the two sides expected him to evaluate the fairness of the deal.

“We all know about my colleague, Judge Rakoff, and everything that happened in a case that apparently is more profound than this one, right?” he said. “But I just wonder at what the role of the court is when the court is being asked to sign off and give its consent to your arrangement. I mean, I guess no judge likes to feel that he or she is a rubber stamp. So what do you envision the role of the court is?”

In particular, Block questioned a proposed injunction barring the former Bear Stearns fund managers from the securities industry for a limited time. After Worland tried to justify the terms of the settlement, Block said, once again, “Am I just a rubber stamp here or is there some inquiry I ought to be making about these provisions? About the fairness of it? Or the reasonableness of it? I’m not so sure I necessarily agree with everything Judge Rakoff wrote, but what should be the judge’s role when the judge is being asked to consent to one of these types of things?”

Then, again citing the relatively small money penalty compared to the investor losses the SEC alleged, Block asked, “Should I write Judge Rakoff, you know, to reflect on whether these hundreds of thousands of dollars and these relatively small penalties adequate or not?” Despite assurances from the SEC and defense counsel (who reminded the judge that their clients had been acquitted in a criminal trial) that the settlement was fair and appropriate, Block asked both sides to submit letter briefs “in light of Judge Rakoff’s standards, which I may not totally agree with.”

I called defense lawyers at Brune & Richard and Hughes Hubbard but none were available to comment. An SEC spokesman declined to comment on Block’s Rakoff-related remarks. The agency, remember, has asked the 2nd U.S. Circuit Court of Appeals for leave to appeal Rakoff’s rejection of the Citi settlement; it has previously argued (to its own detriment before Rakoff) that it’s not the role of a judge overseeing an SEC settlement to consider the public interest.

Carlyn Kolker wrote a terrific piece for On the Case posing the question of who will argue Rakoff’s side of that question if and when the 2nd Circuit takes the SEC’s appeal. If the appeals court is looking for volunteers, Brooklyn is just a subway ride away.

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