On November 28, 2011, Judge Jed S. Rakoff, refused to approve the Consent Judgement entered into between the United States Securities and Exchange Commission ("SEC") and Citigroup Global Markets. United States Securities and Exchange Commission v. Citigroup Global Markets Inc. (SDNY, Opinion and Order, 11-CIV-7387, November 28, 2011). Although presented to the public by the SEC as a compelling settlement (see, "Citigroup to Pay $285 Million to Settle SEC Charges for Misleading Investors About CDO Tied to Housing Market," October 19, 2011), Judge Rakoff found it anything but.
As a longtime critic of the nature of settlements between Wall Street's regulatory community and the big fish players who fill the ranks of the too-big-to-fail and financial superstores, I found Judge Rakoff's Opinion and its underlying rationale not only compelling but perhaps a watershed moment. I would like to offer some of the more momentous comments from the Opinion (pages 8 et seq.; transcript citations and footnotes omitted):
[A]pplying these standards to the case in hand, the Court concludes, regretfully, that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest. Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards. Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt 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.
Bill Singer's Comment: In a nutshell, "neither fair, nor reasonable, nor adequate, nor in the public interest." Hard to believe that such a settlement offer was approved by the SEC and submitted to the Court. How sad that a federal judge must remind a federal agency that the role of the Court in reviewing a proposed settlement is not that of "a mere handmaiden," or that the goal of such a settlement is not to leave the public "deprived of ever knowing the truth. . ."
As for common experience, a consent judgment that does not involve any admissions and that results in only very modest penalties is just as frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies. This, indeed, is Citigroup's positon in this very case.
Of course, the policy of accepting settlements without any admissions serves various narrow interests of the parties. In this case, for example, Citigroup was able, without admitting anything, to negotiate a settlement that (a) charges it only with negligence, (b) results in a very modest penalty, (c) imposes the kind of injunctive relief that Citigroup (a recidivist) knew that the S.E.C. had not sought to enforce against any financial institution for at least the last 10 years (d) imposes relatively inexpensive prophylactic measures for the next three years. In exchange, Citigroup not only settles what it states was a broad-ranging four-year investigation by the S.E.C. of Citigroup's mortgage-backed securities offerings, but also avoids any investors' relying in any respect on the S.E.C. Consent Judgment in seeking return of their losses. If the allegations of the Complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business.
Bill Singer's Comment: As I have often commented in connection with Department of Justice and SEC settlements, checkbook diplomacy results in little more than miscreants engaging in a cost-benefits analysis that seeks to quantify the cost of doing (bad) business. This is a bankrupt approach to regulation.
It is harder to discern from the limited information before the Court what the S.E.C. is getting from this settlement other than a quick headline. By the S.E.C.'s own account, Citigroup is a recidivist, and yet, in terms of deterrence, the $95 million civil penalty that the Consent Judgment proposes is pocket change to any entity as large as Citigroup. While the S.E.C. claims that it is devoted, not just to the protection of investors but also to helping them recover their losses, the proposed Consent Judgment, in the form submitted to the Court, does not commit the S.E.C. to returning any of the total of $285 million obtained from Citigroup to the defrauded investors but only suggests that the S.E.C. "may" do so. In any event, this still leaves the defrauded investors substantially short-changed. . .
Bill Singer's Comment: Readers of Street Sweeper know that I have regularly chastised regulators and prosecutors for being too quick to generate self-congratulatory and self-indulgent press releases. I truly appreciate Judge Rakoff's keen perception and blunt criticism of the SEC's predilection for the "quick headline" in lieu of meaningful sanctions and ensuing tangible reform.
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 admissions or by trials - it serves no lawful or moral purpose and is simply an engine of oppression.
Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances.
Bill Singer's Comment: As majestic and succinct a bank-handed slap as has ever issued from a federal bench - nearly brings tears to my eyes. How eloquent!
In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances.