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Judge Tosses SEC Citibank Settlement: This Could Be a Big Deal

Calling the recent $285 million settlement “neither fair, nor reasonable, nor adequate, nor in the public interest," Judge Jed Rakoff of the U.S. District Court in Manhattan rejected it and set a trial date for July 16, 2012.

This is no surprise to anyone following this case, or who follow this judge.  In 2009 Judge Rakoff threw out the SEC's $33 million settlement with Bank of America, saying it punished shareholders who were already victims of fraud.  The case eventually settled for $150 million.

In the Citibank case, he had already made it clear that he was not happy with this $285 million settlement.  Reuter's reported earlier this month that he considered the settlement grossly inadequate.  Investors lost $700 million.  Why, the judge wondered, would the SEC settle for far less?  Further, he felt that the court was not given enough evidence to assess the merits of the settlement.  His exact description of the settlement during a hearing on November 9 was: "It's just for show."  And so today, Judge Rakoff dismissed it, as you would assume after a statement like that.

Now, why could this be a big deal?

Private cases settle pretty easily.  The defendants and the plaintiffs agree to terms, then the plaintiff drops the complaint.  The judge says OK-- end of case.  Here, the Securities and Exchange Commission tried to do the same--just agree to terms and then voluntarily dismiss the complaint.  The court, the SEC had argued, need not weigh the merits of the settlement terms.  Once plaintiff and defendant agree to terms, the judge just has to approve the dismissal.

Not so fast, says Rakoff:

[W]hen 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. 

The New York Times parses this opinion thusly:

The ruling could throw the S.E.C.’s enforcement efforts into chaos, because a majority of the fraud cases and other actions that the agency brings against Wall Street firms are settled out of court, most often with a condition that the defendant does not admit that it violated the law while also promising not to deny it.

So, Rakoff is calling for far more disclosure and harsher punishments in all SEC settlements.  This would change both the way the SEC settles case and the way judges treat cases brought by governmental agencies like the SEC.  In short, Judge Rakoff would have the courts consider whether a settlement in a case brought by a governmental entity serves the public interest.  This is not the standard in a private case, but, Rakoff argues:  this is not a private case and therefore the public interest matters.

Clearly, the call for more accountability from the financial industry is louder than ever.  Heard of "Occupy Wall Street"?  While Judge Rakoff is not quite the same as a drummer in Zuccotti Park, his call for more disclosure and sterner punishments fits the zeitgeist.  In his order, Rakoff explicitly considers the impact SEC settlements have on private litigations when he writes that the settlement would have helped Citigroup avoid "any investors' relying in any respect on the S.E.C. Consent Judgment in seeking return of their losses."

That is, plaintiffs would have lacked information for any follow-up private litigation.

This is why we here at Chicago Clearing continue to say:  be sure you are ready for the coming wave of settlements.  From Zuccotti Park to the Southern District of New York, people are demanding more accountability.