The SEC Couldn’t Stop Madoff or Stanford But Jams Up Judge Rakoff Over Citigroup Settlement

March 16, 2012

In the controversial case of theSecurities and Exchange Commission v. Citigroup Global Markets, Inc. , we are presented with the absolutely bizarre set of circumstances in which the SEC moved to stay the underlying proceedings in the United States Court for the Southern District of New York (Rakoff, Judge) pending the resolution of interlocutory appeals filed by both the SEC and Citigroup in which bothparties moved to set aside Judge Rakoff's order refusing to approve the parties' proposed consent judgment.

As by now well-publicized, Judge Rakoff is one of a number of federal judges questioning whether the district courts' roles should be mere rubber stamps of settlements hammered out between the SEC and various Wall Street defendants.  In SEC v. Citigroup, Rakoff opined that he did not believe the proposed consent judgment was  fair, adequate, reasonable, or in the public interest because Citigroup had not admitted or denied the allegations.

On appeal to the Second Circuit Court of Appeals, that court made four findings:

1. that the SEC. and Citigroup made a strong  showing of likelihood of success in setting aside the district court's rejection of their settlement, either by appeal or petition for mandamus;

2. the petitioning parties have shown serious, perhaps irreparable, harm sufficient to justify grant of a stay;

3. the stay will not substantially injure any other persons interested in the proceeding; and

4. giving due deference to the S.E.C.'s assessment of the importance of its settlement to the public interest, that interest is not disserved by our grant of a stay.

Consequently, the Second Circuit  granted the motion to stay the proceedings in the district court pending the outcome of these consolidated appeals, and the motion to expedite the appeal is denied.

Bill Singer's Comment

The good folks at Forbes have advised me that I ought not use curse words in my articles.  As such, with blood dripping from my overly bitten tongue, I will likely let the headline to this story explain my feelings.

I have not often agreed with Judge Rakoff and, at times, find him too much of an activist.  Similarly, I have rarely agreed with the SEC.  That being said, given recent history, it is incomprehensible that at a time when the SEC cries to Congress about a lack of funding, that it would allocate precious resources to challenging Rakoff's principled rejection of yet another tepid settlement in a long line of such concessions. Talk about not having a sense of time or place.

On Page 16 of the Circuit Court's Opinion,we find this:

[T]his does not mean that a court must necessarily rubber stamp all arguments made by such an agency. It does mean at least that a court should not reject the agency's assessment without substantial reason for doing so. . . 

Seriously - the SEC has somehow earned the right to arbitrarily decide for the American people and the investor community whether a settlement (to which the SEC is not only a party but also the prime drafter) is fair enough?  If you folks had the track record to back up such a prerogative, that would be one thing.  But looking at your abysmal string of malfeasance and nonfeasance over more than a decade, maybe you should have taken advantage of  Judge Rakoff's opportunity for some much-need introspection.

We now find ourselves in an Alice-In-Wonderland world where the Circuit Court seems to agree that Rakoff should not be required to merely rubber stamp the SEC's settlement but, on the other hand, the judge should defer to the SEC's assessment that the settlement is fair.  A fine enough proposition but one that seems made in a vacuum of recent history.  The SEC's has run off these cookie-cutter settlements without admission of liability for decades.  It is a bankrupt approach to regulation that partially contributed to the onset of the Great Recession and seems likely to saddle our society with a future filled with more impotent responses. If this regulatory policy is fair and effective, then why has it only left a swath of devastation in its historic path?