Personally, i would have loved to see abacus go to trial, especially now Paulson is not the omnipotent god who shorted the housing market.

The SEC almost always settles because they don’t have the resources to prosecute *lots* of cases. But, the SEC is very capable of prosecuting a major case against a major bank, no matter how many white shoe lawyers that bank hires. Several reasons: (1) the law favors the SEC — it has pre-litigation subpoena power, which means it can have a great case before it even files a complaint and it only has to prove negligence (private plaintiffs have neither advantage); (2) the SEC has very good lawyers — it is still, for a young lawyer especially, very prestigious to work at the SEC; they attract excellent attorneys; (3) the SEC and the government in general receive a huge amount of deference from judges and juries; (4) the SEC may not be able to assign 30 lawyers to a case, but it has 70 years of institutional knowledge and experience and the entire DOJ behind it — the resources of the federal government should never be underestimated.

If the SEC couldn’t prosecute any cases, they would never settle any cases. The ability to obtain good settlements is dependent upon a credible threat of trial.

That’s one reason the SEC might actually do well to take a synthetic CDO case through trial — it would help them up the value on future settlements.

Basically, the SEC doesn’t have the legal resources or $$$ to actually prosecute a case completey, so they almost always settle for whatever they can get.

Citi took a half-a-billion dollar prop short on Class V Funding III. The fact that Citi settled that up for ~$160 million at the expense of the long investors who weren’t given disclosures looks good for the SEC.

But Ambac, a monoline insurer, took the long position on the super senior. Ambac was not just a “sophisticated investor” — its business model included insuring RMBS’s and CDOs and it had a substantial portfolio of CDS. Not sympathetic.

(Ambac had its own securities law problems — it got sued by a bunch of pension funds for misleading investors about the extent of its exposure to synthetic CDOs and its RMBS underwriting standards.)

The SEC’s complaint doesn’t name the subordinate investors, but says that they were hedge funds, investment managers and other CDOs. Not a sympathetic bunch.

The bottom line, I think, is that this is not the case — in terms of PR — that the SEC should be trying. Airing the facts will serve the public interest, but I doubt the public has much interest in the woes of a monoline insurer and a collection of hedge funds, other CDOs, and unnamed investment managers.

Now, their action — and subsequent quickie settlement — against JP Morgan about the disclosures for “Squared” at least had Thrivent as a sympathetic duped investor…

Consent judgments are decrees of the court, but practically speaking, they are simply contracts enforceable under the court’s inherent contempt authority rather than private contracts enforceable by filing a new court action.

The court must approve both the monetary and injunctive terms of a consent judgment. Taking out the injunctive part doesn’t give Citi and the SEC an easy out — if money is proposed in the judgment, the court gets to have a say.

SEC could take an interlocutory appeal on Rakoff’s refusal to enter the judgment. But at this point, Rakoff seems to have made his mind up about Citi and so why not take it to trial?

They’re allowed to settle in court, not out of court. The court has to approve the settlement. And in this case, the court didn’t approve. Often the courts do act as rubber stamps, which is unfortunate, and why Jed Rakoff is my nominee for Judge of the Year.

They are allowed to settle because there’s no point having trials if the parties agree on the facts. In a criminal case, for example, you can admit guilt as part of a plea agreement, and take an agreed punishment, as an alternative to taking it to trial. If Citi had done the same (admit guilt), then there would be no issue here.

Chris9059,

I don’t think the 2nd Circuit will sustain it on appeal if it’s just a rejection of the monetary damages. I think they will demand of the district court an affirmative reason why the amount is grossly insufficient, which since it exceeds Citi’s profits from the sale, is unlikely to hold too much water. Most of Rakoff’s argument really centers around the fact that the SEC is asking for his court to become an agent of this ruling through the injunctive relief, or at least that’s how I read it.

You may be wrong about an easy out for SEC/Citi. The court must approve the monetary damages portion of the settlement even if the SEC does not seek an injunction. Rakoff’s reasoning in re the the statutory purpose of the SEC still exists even if injunctive relief is not sought. That is to say, the public interest in establishing a clear determination of whether violations of law occurred still exists and still bars acceptance of the proposed settlement whether or not injunctive relief is sought.