It might be the corporate crime fight of the century.
In this corner, the Securities and Exchange Commission, Citigroup, Wall Street, the big banks, and the vast majority of the corporate crime defense bar.
And in this corner, sitting all by himself, alone in his chair, U.S. District Court Judge Jed Rakoff.
Here comes court appointed attorney John “Rusty” Wing, a partner at Lanker Siffert & Wohl.
The Second Circuit Court of Appeals appointed Wing to brief the case because both the SEC and Citigroup were taking the same side on the issue.
And wait again.
Here comes a group of nineteen securities law professors including – University of Cincinnati Law Professor Barbara Black, Columbia Law Professor John Coffee, Cornell Law Professor Lynn Stout, and Duke Law Professor James Cox – to join Judge Rakoff and Wing.
Last year, Rakoff rejected a proposed settlement between the Securities and Exchange Commission (SEC) and Citigroup, ruling that the settlement was “neither reasonable, nor fair, nor adequate, nor in the public interest.”
Earlier this year, the Second Circuit slapped down Rakoff, saying that “it is not the proper function of federal courts to dictate policy to executive administrative agencies.”
The Second Circuit has yet to set a date for oral arguments in the case.
But the pre-fight trash talk — aka filing of briefs — has begun.
In his brief, Wing challenges the SEC’s and Citigroup’s misreading of Rakoff’s decision.
“The district court did not impose some broad, bright-line rule that no consent judgment could be approved ‘unless liability has been conceded or proved’ and ‘conclusively determined,’” Wing writes.
“Rather, the district court reiterated throughout its opinion that it was simply unable to fulfill its obligation in this particular case to independently determine whether the proposed consent judgment was fair, adequate, reasonable, and in the public interest, when it had not been provided with any ‘evidentiary basis,’ any ‘factual base,’ ‘any proven or acknowledged facts,’ or any other factual showing whatsoever on which to make the requisite determination,” Wing wrote.
In addition, Wing said that the proposed $95 million penalty against Citigroup was “a small fraction of the $535 million penalty imposed for very similar conduct in the Goldman case, and the proposed penalty was based on Citigroup’s purported net profit, not the allowable gross revenue noticeably missing from the complaint.”
The law professors say they have concerns about the SEC’s “practice of settling enforcement actions alleging serious fraud without any acknowledgment of facts, on the basis of a pro forma ‘obey the law’ injunction, a commitment to undertake modest remedial measures and insubstantial financial penalties.”
“The prevalence of this practice is precisely why federal district courts must have discretion, when reviewing consent judgments between a government agency and a private party that include an injunction, to take into account the public interest,” they wrote.
The professors argue that the question before the Second Circuit is whether Judge Rakoff “may refuse to approve a proposed consent judgment in an SEC enforcement action when the parties do not provide the court with information to assess the strength of the agency’s allegations against the defendant.”
And their answer – an unequivocal yes.
After all, Judge Rakoff said he couldn’t approve the SEC settlement with Citigroup because he was not provided “with any proven or admitted facts with which to exercise even a modest degree of independent judgment.”
Had Judge Rakoff approved the settlement without information to exercise its own independent judgment “the court would become a rubber stamp for the agency,” the law professors wrote.
The law professors said the SEC’s settlement with Citigroup was representative of a recurring problem – the SEC files a complaint “alleging serious securities fraud, while simultaneously filing a proposed consent judgment with modest financial penalties, a pro forma ‘obey the law’ injunction against future violations, an undertaking to implement inexpensive remedial measures that appear to be window-dressing and no acknowledged facts.”
“At the same time the SEC issued a press release touting its supposed success: Citigroup to Pay $285 Million to Settle SEC Charges for Misleading Investors About CDO Tied to Housing Market.”
“The press release was accompanied by a chart (‘SEC Charges Stemming From Financial Crisis’) showing monetary recoveries against major financial institutions; the press release concluded by inviting readers to visit the SEC website for information about ‘dozens of other SEC enforcement actions related to the financial crisis.’”
The law professors say that “the prevalence of this practice invites cynicism.”
“Both parties get what they want. The SEC has an opportunity to promote its success, and Citigroup can put the matter behind it and treat the settlement as a ‘cost of doing business.’ The matter is swept under the carpet, and the public is left to wonder what really happened.”
The SEC counters by saying because its complaint contains detailed allegations of wrongdoing which Citigroup cannot deny, that should conclude Rakoff’s inquiry.
Or as SEC Director of Enforcement Robert Khuzami put it – “these are not mere allegations, but the reasoned conclusions of the federal agency responsible for the enforcement of the securities laws after a thorough and careful investigation of the facts.”
“The SEC’s position effectively leaves no place for judicial review,” the law professors write. “‘Trust us,’ says the SEC.”
“During the hearing on the proposed consent judgment, the SEC’s attorney stated that ‘we don’t believe. . . that the public is left wondering what occurred in this case,” the law professors write.
When Judge Rakoff asked Citigroup’s attorney whether his client admitted the allegations, he responded: “We do not admit the allegations, your Honor. But if it’s any consolation, we do not deny them.”
But the law professors say that in its appeal of Judge Rakoff’s ruling, “Citigroup makes it clear that it does dispute the SEC’s allegations.”
The law professors argue that the SEC’s “willingness to settle, on the basis of Citigroup’s flippant statement that ‘if it’s any consolation, we do not deny them,’ suggests a rather cynical relationship between the parties that worried this same judge in a review of a previous SEC proposed consent judgment, SEC v. Bank of America Corp., and casts into serious doubt the SEC’s assertion that the public somehow understands what happened in this case.”
“In the face of the parties’ united stance against providing information, the court acted within its discretion in refusing to approve the proposed consent judgment,” they conclude.
The law professors say they are also concerned that the SEC measures success “to a large extent by the number of actions brought.”
“The SEC Chairman and the SEC Director of Enforcement frequently point with pride to the number of enforcement actions filed,” they write.
“For example, Director Khuzami recently testified before a Congressional committee: ‘the SEC’s enforcement program is achieving significant results. During FY 2011, the Commission filed 735 enforcement actions — more than the SEC has ever filed in a single year.’”
“Statements like these bear an unfortunate resemblance to a sheriff’s carving notches on his gun to prove his toughness,” they wrote.
The law professors said they “doubt whether quick and easy settlements are likely to promote deterrence.”
“Although the SEC frequently points with pride to the dollar amounts of settlements, in fact overall settlement amounts have not increased significantly during the past decade and settlements in major ‘high-value’ cases have declined in recent years.”
“In addition, the perception that the SEC’s practices do not achieve effective deterrence and that the consent judgments are formulaic and rote is exacerbated because the SEC rarely seeks to hold a defendant in contempt for breach of an injunction against further securities violations,” the law professors wrote.
“Citigroup and its affiliates have been enjoined from violating securities laws four times since 2000, yet have not been the subject of a contempt proceeding. Indeed, the SEC informed the district court that the SEC ‘does not appear to have [civil contempt] proceedings against a large financial entity in the last ten years. It is difficult to see how the SEC’s settlement practices serve to deter future violations, and they contribute to a jaundiced view of the relationship between the agency and the financial industry.”