Recent Ruling Against Citibank and SEC Nothing to Cheer About


Last week, Judge Jed S. Rakoff, a federal district judge in Manhattan, became an instant folk hero for the Occupy Wall Street movement.

In a 15-page ruling, Rakoff took the Securities and Exchange Commission (SEC) to task over its proposed settlement of $285 million with Citigroup over its practices in packaging and selling mortgage-backed securities that its own traders were betting against through the derivatives market. It wasn’t the monetary figure that enraged Rakoff, though, but something much more fundamental. He wrote that the SEC had “a duty, inherent in its statutory mission, to see that the truth emerges.” The SEC, he believed, should not have allowed Citigroup to settle the case without admitting nor denying the agency’s findings.

Many across the political spectrum cheered, seeing it as a seminal moment towards the Occupy Wall Street movement, highlighting significant policy pushback against Wall Street’s power in America. Jonathan Macey wrote in Politico that Rakoff’s attack on the 1% amounted to the “Wall Street bankers” and “not the Occupiers … getting hit by pepper spray. To Macey, Rakoff justly took a sledgehammer to the chumminess between the “purported government watchdog” SEC and the financial and securities industries.  Macey, like many other commentators, inferred that a settlement standard in the regulatory world amounted to some sort of nefarious collusion between the government and the banks.

In some idealized alternate universe, Rakoff’s ruling indeed could be something to cheer about. No longer would the regulated financial industry escape an SEC civil enforcement action without the truth being admitted or revealed through litigation, nor would banks and broker-dealers and investment advisers escape merely with settlements consisting of civil penalties and disgorgement of profits.  In that alternate universe, the SEC would vigorously pursue all perpetrators of fraud and greed, driving all deceit and improper behavior from Wall Street. 

In the real world of 2011, the SEC is underfunded and has limited resources. Federal courts are already backlogged and understaffed. No new government spending and staffing is on its way. The SEC is making pragmatic decisions to further the public interest and enforce violations of securities regulations. If faced with a mandate as Rakoff would require, the SEC would be forced to pursue less fraud cases — not more. The respondents in these civil actions (which are not criminal prosecutions) would never settle under such harsh terms, because it would expose them to countless private suits in the future. There would be no incentive on the banks’ part to settle. The SEC enforcement actions would bog down federal courts even further, resulting not only in slower resolution for the public in cases against Wall Street but in all other types of litigation across the country. 

Beyond the practical problems with Rakoff’s order against the SEC and Citibank, there is a much bigger issue with his critique of the settlement. The outrage against the “chumminess” of these “no admit, no deny” settlements is simply misguided. It may surprise some, based on the media coverage, that such settlements are not unique to the SEC. For example, Jenna Greene of the National Law noted that companies settling with the EEOC over sexual harassment allegations can submit themselves to a settlement through a consent decree while still fully denying the allegations. Likewise, the EPA let a construction materials company off the hook just last week with a $740,000 settlement while neither admitting nor denying liability, the facts, nor anything about the law. 

Regulators across the government often pursue such settlement agreements because it is in the public interest to do so. Respondents in regulatory actions are not criminal defendants, and they don’t receive the same due process protections that criminal defendants do. The system is designed to allow these industry regulators to work with various industries to ensure they are conducting themselves within the bounds of the law.  When needed, the regulators bring actions to force entities in those industries to comply with the law. Often, industries also have self-regulators (such as FINRA in the financial world), which also aggressively monitor the industry. 

As much as some may imagine while protesting in parks around the country, this is not the Wild West out there. It is a highly regulated and complicated world that rarely is actually in black and white. And now that the anger against the system is being misguidedly infused into the regulatory and legal process, Occupy and its supporters just might find they won’t get what they bargained for.


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