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Jed Rakoff To SEC: I'm Not Here To Rubber-Stamp Your Deals

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U.S. District Court Judge Jed Rakoff, who rejected a proposed $285 million settlement between the SEC and Citigroup because he could not determine, he said, whether it was fair.
U.S. District Court Judge Jed Rakoff, who rejected a proposed $285 million settlement between the SEC and Citigroup because he could not determine, he said, whether it was fair.

U.S. District Court Judge Jed Rakoff doesn't need an admission of guilt in order to approve a controversial Citigroup settlement with government regulators -- just evidence to determine whether the closed-door deal is fair.

That's the response Rakoff's lawyer made in a filing with the Second Circuit Court of Appeals on Monday in a case likely to determine how much oversight a judge really has over settlements struck between the Securities and Exchange Commission and Wall Street banks.

Rakoff, a New York federal judge, has emerged as the SEC's chief antagonist in an ongoing dispute over whether the agency too easily allows defendants to "neither admit nor deny" guilt as a condition of a financial settlement in a civil case. He also said the agency inconsistently applies its own charging standards and fails to present for public review the evidence gathered in its investigations.

His stand has won praise from critics who say the government isn't doing enough to hold those responsible for causing the financial crisis accountable. The SEC has argued that Rakoff is overstepping his bounds and that the agency, not a judge, is in the best position to determine the proper resolution to financial fraud cases. Traditionally, judges have shown deference to regulatory agencies in determining the proper penalties in securities cases.

In this case, Citigroup is accused of marketing toxic mortgage bonds to customers while secretly betting against those same investments. Rakoff rejected the proposed $285 million deal in November and ordered a trial. The SEC and Citigroup appealed, arguing that it isn't a court's role to dictate how the agency should settle its cases.

If defendants were required to admit guilt as a condition of a settlement, "other frauds might never be investigated or be investigated more slowly because limited agency resources are tied up in litigating a case that could have been resolved," the SEC said in its appeal.

In March, the Second Circuit issued a preliminary ruling in which it pretty much agreed with Citigroup and the SEC. According to the court, Rakoff had "misinterpreted" precedent in deciding to evaluate the public interest and "does not appear to have given deference to the SEC's judgment on wholly discretionary matters of policy."

But in his brief, Rakoff argues that the SEC and Citigroup -- and also the Second Circuit -- don't understand his justification for nixing the settlement. Rakoff claims in his brief that he never said the SEC had to prove liability, nor did he say that Citigroup must admit to wrongdoing. Instead, the SEC asked him to rubber-stamp a deal without presenting any evidence that he could examine to determine whether the deal was fair or not.

(Emphasis is Rakoff's.)

"[T]he 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."

Moreover, according to the brief, the settlement was puzzling in the context of an earlier $550 million settlement between the SEC and Goldman Sachs over what Rakoff viewed was a similar case. Why was Citigroup settling for so much less? Rakoff had no way to tell, his lawyer argues.

"[I]n this case, neither party, though given ample opportunity, chose to present the court with any evidence of any kind," Rakoff's lawyer said in the brief.

The SEC did not immediately return a request for comment.

In rejecting the deal, Rakoff said that the SEC chose to charge Citigroup only with negligence. But in a parallel complaint filed the same day against Citigroup employee Brian Stoker, the agency alleged that the bank knew in advance it would be hard to sell the mortgage-backed bonds if it first disclosed its aim to bet against the investments. This would be tantamount to an allegation of "knowing and fraudulent intent," the judge said in his initial ruling.

Why the discrepancy? Rakoff said he is now better equipped to answer that question, though he didn't indicate what his answer might be. The judge recently presided over a jury trial where a federal jury acquitted Stoker of any wrongdoing in the marketing of the mortgage investments.

The upshot of that case, Rakoff said through his lawyer, is that he now has the evidence he needs to determine whether the civil fine deal with Citigroup is fair.

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