CORPORATE CRIME REPORTER
Rakoff
Obeys the Second Circuit
24 Corporate Crime Reporter 8, February 16, 2010
It’s not that Jed Rakoff lives in fear of the Second Circuit.
It’s just that the Second Circuit is to his court what Hilda was to Rampole – she who must be obeyed.
So, it was on that basis that Judge Rakoff turned down pleas by the New York Times, Bloomberg and Barron’s to unseal a potentially politically explosive case against the Financial Industry Regulatory Authority (FINRA).
The lawsuit – Standard Investment v. FINRA – alleges that FINRA member firms are due more than the $35,000 they received as part of the 2007 merger between National Association of Securities Dealers (NASD) and the regulatory arm of the New York Stock Exchange – a merger that resulted in the creation of FINRA.
At the time of the merger negotiations, NASD told its members that because it was a non-profit, the most it could pay each firm was $35,000 – for a total of about $175 million.
But in March 2007, the Internal Revenue Service (IRS) issued a private letter ruling which indicated that in fact NASD could pay a lot more than $35,000.
How much more is a secret.
Although in court in December 2009, Jonathan Cuneo, the lawyer for the plaintiffs, estimated that the amount is anywhere from $35,000 per member more to $76,000 per member more.
So we’re talking damages of between $175 million and $380 million.
It’s a politically explosive case because of at the time of the merger, the CEO of NASD was Mary Schapiro.
Schapiro is now chair of the Securities and Exchange Commission (SEC).
In an October 2009 letter to Judge Rakoff, Jim McTague, Barron’s Washington D.C. editor, asked that correspondence between the Internal Revenue Service and the NASD be made public.
McTague said he was researching a news story about the lawsuits alleging that the $35,000 a share merger between the NASD and the regulatory arm of the New York Stock exchange “was a low ball payment possibly founded upon a lie.”
“There is an irony if the correspondence should reveal that NASD, now FINRA, deliberately lied to its members because then a self-regulatory body, charged with protecting the investors at large, may have engaged in fraud and violated federal securities laws by making false statements in proxy materials,” McTague wrote.
Rakoff turned down the request to unseal the correspondence based on what he called “vertical precedent – the obedience the lower courts owe to prior decisions of higher courts regardless of whether the lower courts agree or disagree with those decisions.”
The information in question was sealed by Rakoff’s predecessor on the case – the late Judge Shirley Wohl Kram.
Judge Kram’s seal order was appealed to the Second Circuit.
And less than six months ago, the Second Circuit ruled that Judge Kram’s order was not an abuse of discretion.
The news organizations argued that circumstances have changed since Judge Kram’s order.
Most importantly, Mary Schapiro is now the head of the SEC.
“If the promotion of a public figure to a position of even greater public scrutiny were a sufficient basis to revoke a sealing order, no public figure could ever rely on a sealing order and the presumption in favor of the continuation of such orders would become the plaything of fortuity,” Judge Rakoff wrote.
Last month, Rakoff said in court that had he been the presiding judge when the case was first presented – “I would have come out a different way.”
But he wasn’t in a position to buck the Second Circuit.
“It is doubtful that a district court, absent the most extraordinary circumstances, could ever refuse to follow the ruling of the Court of Appeals rendered just six months prior on the very same issue in the very same case,” Judge Rakoff wrote.
“What Hilda is to Rumpole, the Court of Appeals is to this court: she who must be obeyed.”
Rakoff is scheduled to rule on a motion to dismiss the lawsuit by the end of the month.
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