Taking a broad swipe at the practice of allowing companies to settle securities cases without admitting that they had done anything wrong, a federal judge on Monday rejected a $285 million settlement between Citigroup and the SEC.
“The judge, Jed S. Rakoff of United States District Court in Manhattan, said that he could not determine whether the agency’s settlement with Citigroup was “fair, reasonable, adequate and in the public interest,” as required by law, because the agency had claimed, but had not proved, that Citigroup committed fraud.
….The agency contends that it must settle most of the cases it brings because it does not have the money or the staff to battle deep-pocketed Wall Street firms in court. Wall Street firms will rarely admit wrongdoing, the agency says, because that can be used against them in investor lawsuits.
The agency in particular, Judge Rakoff argued, “has a duty, inherent in its statutory mission, to see that the truth emerges.” But it is difficult to tell what the agency is getting from this settlement “other than a quick headline.” Even a $285 million settlement, he said, “is pocket change to any entity as large as Citigroup,” and often viewed by Wall Street firms “as a cost of doing business.”
According to the Securities and Exchange Commission, Citigroup stuffed a $1 billion mortgage fund that it sold to investors in 2007 with securities that it believed would fail so that it could bet against its customers and profit when values declined. The fraud, the agency said, was in Citigroup’s falsely telling investors that an independent party was choosing the portfolio’s investments. Citigroup made $160 million from the deal and investors lost $700 million.
Judge Rakoff said the agency settlement policy — “hallowed by history, but not by reason”— creates substantial potential for abuse because “it asks the court to employ its power and assert its authority when it does not know the facts.” That undermines the constitutional separation of powers, he said, by asking the judiciary to rubber-stamp the executive branch’s interpretation of the law…
“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” Judge Rakoff wrote. “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.”
Read the whole important story here: Judge Blocks SEC Settlement (Thanks Peter)
My take: 1. Yes it is true the securities regulators have been underfunded and under-staffed on purpose so that no serious prosecutions can be mounted against the many offending securities firms who hire expensive lobbyists to occupy Washington and make sure that no serious regulation and prosecutions of offenders are possible.
2. Yes it is an embarrassment to democracy and the rule of law that these firms are able to browbeat the intentionally under-funded regulators into accepting minor fines with no admission of crime, public disclosure of the facts or contrition thereafter. This is like coming to a closed-door agreement with a pedophile for a fine but not making them plead guilty to a public record of facts so that the public might protect themselves against future risks of repeated offence. Actually worse, because in this case, as noted by Rakoff, Citigroup and other banks have been repeat offenders because they know that regulators are not staffed to monitor their compliance and bring contempt charges for repeat violations over the past 10 years.
3. Meanwhile America has more people in prison than any other country in the world. But “them be mostly the poor folks”. The status quo has brokered a ‘keep out of jail’ card that allows wealthy securities firms and offenders off the hook with nuance fines.
Remember there can be no meanigful recovery to economic health until we admit, repent, reform chrony capitalism and the financial sector.