‘Very Good Deal For Citigroup’ Rejected By Rakoff As ‘Inherently Dangerous’

In a striking decision that undoubtedly will be supported by a vast swath of Americans, from the Tea Party to OccupyWallStreet, from homeowners to the unemployed, and that will cause worry in boardrooms across the country, U.S. District Court Judge Jed S. Rakoff has rejected the proposed $285 million settlement between the SEC and Citigroup. 

Rakoff reasoned that he had “not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment.”
 
Rakoff determined that any settlement between the SEC and Citigroup had to be “fair to the parties and to the public.”
 
Rakoff concluded that the proposed consent judgment was “neither fair, nor reasonable, nor adequate, nor in the public interest.”
 
The court said that the SEC’s “long-standing policy” of “allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations” deprived the court “of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.”
 
In the court’s view, the policy “of accepting settlements without any admissions serves various narrow interests of the parties.” However, the court continued, if the SEC’s allegations were 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.”
 
With respect to the public, the court’s decision stated: “the combination of charging Citigroup only with negligence and then permitting Citigroup to settle without either admitting or denying the allegations deals a double blow to any assistance the defrauded investors might seek to derive from the S.E.C. litigation in attempting to recoup their losses through private litigation, since private investors not only cannot bring securities claims based on negligence…but also cannot derive any collateral estoppel assistance from Citigroup’s non-admission/non-denial of the S.E.C.’s allegations.”
 
In refusing to issue the injunction that was to be part of the settlement, the court stated that “[a]n application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous.”
 
Finally, the court concluded, in a 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….[T]he S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges.”
 
The court set a trial on the SEC’s complaint for July 16, 2012. Much, much will happen before then, as a result of this remarkable ruling.