Justin Maxon/The New York TimesJudge Jed S. Rakoff has often been at odds with settlements reached by the S.E.C. Related Links Updated, 1:08 p.m. |
A federal appeals court on Wednesday overturned a judge's decision to reject a federal settlement deal with Citigroup, undercutting the judge's concerns that the bank got off with little more than a slap on the wrist.
In a long-awaited 28-page opinion, a three-judge panel of the United States Court of Appeals for the Second Circuit concluded that the trial judge "abused its discretion by applying an incorrect legal standard in its review" of the case. The harsh rebuke of the judge, Jed S. Rakoff, now sets in motion a process that will most likely lead to the deal being approved.
The opinion, coming nearly three years after the bank settled the case with the Securities and Exchange Commission, represents a turning point in the debate over how to punish Wall Street misdeeds. As Wall Street remains under the federal spotlight, facing both criminal and civil scrutiny, banks looked to the Citigroup case as a barometer for the broader crackdown.
Ultimately, the Second Circuit's opinion hands a victory not only to Wall Street, but also to its federal regulators, which now gain some additional leeway when negotiating settlement deals with Wall Street.
Unlike most judges who rubber stamp settlements, Judge Rakoff of the Federal District Court in Manhattan rejected what he saw as a sweetheart deal for Citigroup, which the S.E.C. accused of duping investors into buying a complex mortgage deal during the waning days of the housing boom. The bank agreed to pay $285 million to settle the civil fraud case.
Judge Rakoff, a former federal prosecutor and defense lawyer known for his maverick ways, called the fine "pocket change" for the bank. Echoing broader concerns about the government's response to the financial crisis and its pursuit of financial crime, the judge also took aim at the S.E.C.'s decision to allow Citigroup to settle the case without admitting wrongdoing, saying the parties deprived the public "of ever knowing the truth in a matter of obvious public importance."
His effort was not in vain. The S.E.C. last year reversed its longstanding yet unofficial policy of allowing companies to neither "admit nor deny wrongdoing," signalling that it would force admissions in particularly egregious cases.
Judge Rakoff's standoff with the S.E.C., while instilling fear in Wall Street and its regulators, also inspired other judges to follow suit in a handful of cases. And to critics of Wall Street, the judge developed something of a celebrity status, becoming a symbol of the effort to crackdown on Wall Street misdeeds.
"The Second Circuit can't put the genie back in the lamp," said Jill E. Fisch, a professor at University Pennsylvania School of Law who specializes in corporate law. "This opinion is not going to turn back the clock."
Still, the Second Circuit's decision will effectively rein in any future judicial uproar. The three-judge panel provided guidelines for exercising discretion over federal enforcement cases, potentially tying a judge's hands so long as the S.E.C. followed proper procedures.
"It is an abuse of discretion to require, as the district court did here, that the S.E.C. establish the "truth" of the allegations against a settling party as a condition for approving the consent decrees," the appellate panel wrote in its opinion. "Trials are primarily about the truth. Consent decrees are primarily about pragmatism."
The three-judge panel — Rosemary S. Pooler, Raymond J. Lohier Jr. and Susan L. Carney — added that it "is not within the district court's purview to demand 'cold, hard, solid facts."
The appellate ruling will have an immediate impact on another big case–the more than $600 million settlement of an insider trading lawsuit the S.E.C. filed against Steven A. Cohen's SAC Capital Advisors. Judge Victor Marrero, also of the Federal District Court in Manhattan, approved the settlement in April 2013, but made his decision contingent on the outcome of the appeal in the Citigroup case.
In his opinion, Judge Marrero said that he had serious concerns with the "neither admit nor deny" language contained in the settlement with SAC, but would approve the deal pending further guidance from the Second Circuit.
Legal experts said that the Second Circuit will not force Judge Rakoff, or any other judge, to be a rubber stamp.
"But they are saying he went too far," said Carl Tobias, a professor at the University of Richmond School of Law.
The appellate court, while remanding the Citigroup case back to Judge Rakoff, did not require him to immediately approve the deal. The judge, the court ruled, may still pry loose additional disclosures from the S.E.C. and Citigroup.
"On remand, if the district court finds it necessary, it may ask the S.E.C. and Citigroup to provide additional information sufficient to allay any concerns the district court may have regarding improper collusion between the parties," the appellate court wrote in its ruling, written by Judge Pooler.
In a concurring opinion, Judge Lohier remarked that he was inclined to order Judge Rakoff to approve the deal. He added, however, that "it does no harm" to allow "the very able and distinguished" Judge Rakoff to make the final determination.
The decision to allow the judge to seek out additional information seemed to placate critics of the Citigroup settlement.
"That is essential if courts are to provide transparency, oversight and accountability in connection with S.E.C. settlements that often impact tens of millions of Americans and tens of billions of dollars," said Dennis Kelleher, the head of Better Markets, an advocacy group that filed a so-called friend of the court brief in support of Mr. Rakoff.
Judge Rakoff, known for his quick wit and sometimes contrarian views in the courtroom, has not contained his concerns to the Citigroup case. He was also unhappy with an earlier S.E.C. deal with Bank of America. And when he finally approved that deal — after the regulator agreed to raise the fine — he still called it "half-baked justice at best."
Outside the courtroom, Judge Rakoff also has been a thorn in the side of prosecutors. He recently wrote an article in The New York Review of Books that took issue with the excuses federal authorities mounted for not charging any top Wall Street executives.
For any other judge the article might have seemed unusual. For Mr. Rakoff, it was perfectly in character.
"He is a bit contrarian and that is a good thing", Mr. Tobias said. "I think he relishes that to some extent."
Judge Rakoff declined to comment on the ruling, as did Citigroup.
In a statement, the S.E.C.'s enforcement director, Andrew Ceresney, said he was pleased with today's ruling." He added that "while the S.E.C. has and will continue to seek admissions in appropriate cases, settlements without admissions also enable regulatory agencies to serve the public interest."
The prospect of wide-scale admissions initially alarmed Wall Street and the white collar bar.
At oral arguments before the Second Circuit last year, Brad S. Karp, a lawyer for Citigroup, seized on concerns about judges and the S.E.C. suddenly requiring admissions of wrongdoing. The admissions, in theory, could open the floodgates to shareholder lawsuits.
"Many corporations will decide to not settle matters if a requirement is to admit liability," Mr. Karp said. "The federal regulatory enforcement regime would screech to a grinding halt."
His argument appeared to resonate with the Second Circuit.
In its ruling, the appellate court outlined a checklist for judges to follow when weighing enforcement cases. The "proper standard for reviewing" a case, the court ruled, requires a judge to "determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the public interest would not be disserved."
The notion of public interest, however, "rests squarely with the S.E.C."
Michael Corkery contributed reporting.
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