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Court Overturns Rare Challenge of SEC-Wall St. Settlement

A district judge abused his discretion when he rejected a proposed settlement between the Securities and Exchange Commission (SEC) and Citigroup, according to an opinion reached today by a U.S. appeals court. The opinion overturns a rare attempt by a federal judge to challenge a boilerplate enforcement action against a powerhouse Wall Street bank.

In a landmark 2011 decision that crystallized widely held concerns about the government’s oversight of Wall Street, U.S. District Judge Jed S. Rakoff threw out a proposed $285 million settlement between the SEC and Citi for alleged misdeeds tied to the 2008 financial crisis. Rakoff found that the proposed deal was “neither fair, nor reasonable, nor adequate, nor in the public interest.”

Without “some knowledge of what the underlying facts are,” Rakoff wrote, “the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.”

Today’s 28-page opinion by U.S. Court of Appeals for the Second Circuit found that Rakoff “applied an incorrect legal standard” when he tossed out the Citi settlement.

“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 court wrote. “Trials are primarily about the truth. Consent decrees are primarily about pragmatism.”

The court also held that “determining whether the proposed S.E.C. consent decree best serves the public interest” is a decision that “rests squarely with the S.E.C.” and “merits significant deference.”

In the Citi case, the bank did not admit or deny the agency’s charges—a common provision in government settlements that has come under fire by Rakoff and other critics in recent years. In the years since Rakoff’s 2011 decision, the SEC has taken steps to bolster its enforcement actions, such as requiring defendants to admit wrongdoing in some instances.

By: Michael Smallberg
Investigator, POGO

Michael Smallberg, Investigator Michael Smallberg is an investigator for the Project On Government Oversight. Michael's investigations center on oversight of the financial sector.

Topics: Financial Sector

Related Content: Checks and Balances, Securities and Exchange Commission

Authors: Michael Smallberg

Submitted by pieface at: June 10, 2014
DAM right it's time to clean up the courts-especially the US Appeals Court who obviously thinks it's OK for CitiGroup to "mislead" investors about mortgage-backed securities wherein they bet against investors as the housing market defaulted, leaving investors with $1 billion in losses while Citigroup made $160 million in fees and trading profits (no problem there, right?)--no, "the problem" according to making SEC establish the "truth of the allegations" against CitiGroup before he would approve the consent decree (that's a problem, "holding the guilty party accountable?") I see the US Appeals Courts is about as competent as the US Supreme Court who thinks "Money is SPEECH"
Submitted by Ianoue at: June 9, 2014
Judge Rakoff is a public servant and public hero. Good for him. Don't give up Judge Rakoff!!
Submitted by nuzzlehorse at: June 7, 2014
BS! It is time to clean up the court system, which may create a huge impact on the election process and rid the country of less than adequate representation.
Submitted by D'Artagnan at: June 7, 2014
The misdeed here lies with the US Court of Appeals for the second circuit for signaling to corporations that they may without serious impunity lie, cheat and steal and continue to hold on to their profits after paying a small fine, admitting nor denying nothing and hiding behind gag orders accepting that this is how business, which harms everyone but corporate officers and legal counsel, is done. Judge Rakoff is to be commended.
Submitted by Inmytime at: June 7, 2014
So whose pocket is the 2nd Circuit in? Bad business as usual.
Submitted by A Truther at: June 7, 2014
Well, I guess it is true, "Too Big to Prosecute, Too Big to Fine, Too Big to Jail." Let us wait and see what this fellow, judge Radoff will be driving in month, where he will buying another condo and how many others cases he will throw in the years ahead. Perhaps he should have found the S.E.C. in contempt for bring such a case to his Court of Clowns. One day, "Heads will Roll," as will his, among others.
Submitted by JohnK at: June 7, 2014
If the appeals court is correct, why was the case even brought to the district court? Haven't they just said that the courts have no jurisdiction?

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