This week, Judge Rakoff of the U.S. District Court in Manhattan finally approved SEC’s $285 million deal with the Citigroup that let the company off the hook without denying or admitting any guilt. Rakoff had earlier blocked the deal as “pocket change” and grossly disproportionate to the profits made by Citigroup by engaging in the conduct questioned by SEC.
However, in June, a three-judge panel of the Court of Appeals for the 2nd Circuit overturned Rakoff’s decision. Following the decision of the 2nd Circuit, Rakoff had no other option but to rubber stamp the settlement, but he didn’t go down without a few parting salvoes at the 2nd Circuit’s opinion. And these are truly interesting.
If Rakoff is read right, then what the 2nd Circuit implies is that the SEC is a body subject to political accountability, and as an administrative body it has the power to settle decisions without oversight of the courts. In essence the scenario would be like: corporate robs people by borderline economic conduct – makes billions – makes deal with SEC “without admitting or denying” anything – pays a few millions to make everyone happy and gets back to business with a new model to rob the people with impunity.
In his order, finally accepting the Citigroup-SEC deal, Judge Rakoff opens the ball by noting: “They who must be obeyed have spoken, and this Court’s duty is to faithfully fulfill their mandate.”
The 2nd Circuit had noted in its opinion that for the district court approving a settlement forwarded by the SEC proof or “adequacy” is not required. On this point Judge Rakoff notes: This would be true, the Court of Appeals stated, even in those cases where “there is no private right of action, [because] then the S.E.C. is the entity charged with representing the victims, and is politically liable if it fails to adequately perform its duties.”
Rakoff says it is difficult to know what the Court of Appeals meant by “politically liable” since the SEC, by its charger, is designed to be free of political interference … and routinely asserts its independence from political pressure.
Rakoff also pointed out other observations made by the Court of Appeals including, “determining whether the proposed S.E.C. consent decree serves the public interest … rests squarely with the S.E.C.”; and … the “primary focus of the [district court’s] inquiry … should be on ensuring the consent decree is procedurally proper … taking care not to infringe on the S.E.C.’s discretionary authority to settle on a particular set of terms.”
Rakoff noted in the concluding paragraph of his opinion, “this Court fears that, as a result of the Court of Appeal’s decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever … That Court has now fixed the menu, leaving this Court with nothing but sour grapes.”