Three heavily abbreviated takes on what the case means:
Federal Judge Pimp-Slaps the SEC Over Citigroup Settlement, Rolling Stone
By accepting hundred-million-dollar fines without a full public venting of the facts, the SEC is leveling seemingly significant punishments without telling the public what the defendant is being punished for. This has essentially created a parallel or secret criminal justice system, in which both crime and punishment are adjudicated behind closed doors…
Judge Rakoff blew a big hole in that practice yesterday. His ruling says secret justice is not justice, and that the government cannot hand out punishments without telling the public what the punishments are for… The SEC in this case incredibly argued – out loud, on paper – that it could make regulatory decisions without considering the public interest. In particular, it argued that it didn’t need to consider the public interest when granting “injunctive relief,” i.e. an injunction barring future behaviors, as opposed to the stiffer and more immediate punishment of fines or criminal charges…
The Rakoff ruling shines a light on the way these crappy settlements have evolved into a kind of cheap payoff system, in which crimes may be committed over and over again, and the SEC’s only role is to take a bribe each time the offenders slip up and get caught.
Citigroup Settlement Rejected (Parts 1-4), the Race to the Bottom
It is clear that Judge Rakoff does not like the settlement on substantive grounds. He was unhappy with the amount (noting that investors lost $700 million) and viewed the settlement as inconsistent with the one reached in the Goldman case…
It is clear that Judge Rakoff does not like the settlement on substantive grounds. He was unhappy with the amount (noting that investors lost $700 million) and viewd the settlement as inconsistent with the one reached in the Goldman case… it was the serious impact of the settlement (which presumably equated to a public benefit) that required the court to insist on factual findings…
This could significantly increase the number of cases that were litigated… Because the SEC has limited resources, more litigation would mean less money for other administrative activities. The Commission could strip funds away from operating divisions and give them to Enforcement. Or Enforcement would, within its own budget, be forced to spend more on litigation and less on investigations.
Alternatively, the decision could paradoxically result in less protection for the public. This could push the SEC to bring more settlements as administrative proceedings. These proceedings are not subject to court approval. Moreover, because violations are not enforceable through contempt proceedings, the public arguably gets less protection…
The court has ordered that it go to trial. That is one possible outcome… The Commission could seek an interlocutory appeal. This would require approval by Judge Rakoff. See Section 1292(b). The SEC could dismiss the case. See FRCP 41(a) (allowing for voluntary dismissal upon “a stipulation of dismissal signed by all parties who have appeared.”). If that were to occur, the case could be refiled and settled as an administrative proceeding. That, however, would merely postpone the issue for another day. The judges in the Southern District are repeat players in the securities litigation area and the SEC will be presenting other “substantial” settlements to Judge Rakoff.
John M. Baker, Stradley Ronon Stevens & Young, LLP
Robert Khuzami, Director of the SEC’s Division of Enforcement, issued a statement arguing that the practice of settling cases without a defendant’s admission of wrongful conduct has significant advantages and is widely accepted. He said that the SEC will continue to review the court’s ruling and take those steps that best serve the interests of investors.
Khuzami is undoubtedly right that Judge Rakoff’s opinion is an outlier. Thousands of consent judgments, in actions brought by the SEC and by other federal regulators, have been entered on the basis of facts that were neither admitted nor denied by the defendants. Judge Rakoff’s opinion implies that all of those settlements were improperly approved. If there are any precedents supporting his view, he did not cite them in his opinion. Still, Judge Rakoff’s opinion is eloquently written and gives close attention to an issue that other courts generally have ignored, so it could be influential. If so, that will give the SEC a strong incentive to bring enforcement actions as administrative proceedings, which do not require court approval. Under current law, however, while the SEC can obtain disgorgement and injunctive relief in an administrative proceeding, it is limited in the amount of monetary penalties it can obtain.
Chairman Schapiro on Monday sent a letter to two key Senators, arguing for several enhancements to the SEC’s statutory authority to obtain civil monetary penalties for securities law violations. Schapiro’s letter does not mention the Citigroup case and may have been written before Judge Rakoff’s order was released, but it responds to several concerns raised by his order. Perhaps most significantly, the letter’s approach would allow for the same monetary penalty relief in administrative proceedings as in court actions. Among other changes, the letter also argues for authorizing a monetary penalty based on investor losses (which can be much greater than the defendant’s profit); allowing penalties equal to three times the gross amount of pecuniary gain for tier three violations (the most serious kind); and providing for civil penalties against recidivists. Schapiro said she has asked her staff to prepare draft legislative language.
My Two Cents
So, it appears highly likely that the case will never go to trial, which may be administratively much more reasonable and feasible. However, as Judge Rakoff says,
(The) point, however, is not that certain narrow interests of the parties might not be served by the Consent Judgment, but rather that the parties’ successful resolution of their competing interests cannot be automatically equated with the public interest, especially in the absence of a factual base on which to assess whether the resolution was fair, adequate, and reasonable…
(The) SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”
Maybe some cases are just too big and too important to be settled through normal mechanisms. This wouldn’t be the first settlement between the SEC and Citigroup. How long can we afford to allow repeat offenders to deceive the public and their own shareowners and pay fines as a cost of doing business? At the very least, the SEC needs to impose something like real probation for Citigroup, complete with ankle bracelet and real monitoring.
Out here in California we had the case of Jaycee Lee Dugard who was abducted when she was eleven years old. For eighteen years she was systematically abused and kept in an area behind her kidnapper’s house. As a prior sex-offender on parolee, he was monitored, wore a GPS-enabled ankle bracelet, and was regularly visited by police.
Just as the public out here was outraged with the failure of authorities to properly monitor Phillip Craig Garrido, the U.S. public and investors should be outraged that the SEC once again failed to adequately monitor a repeat financial offender. Imposing fines that are essentially passed on to Citigroup shareowners is no deterrent, especially given the fact that shareowners can’t even effectively nominate directors.
Our system needs to punish real people. If it can’t do that, it needs to be reformed so that it can. Additionally, the SEC’s funding should come from a small tax on financial transactions, not from fines they impose on wrongdoers which give them an incentive to work hand in hand with criminals. Fines should be geared toward minimizing future misdeeds. Here’s just a brief list of how such assessments could be put to good use:
- Put Citigroup on probation and have the internal auditor report to the SEC until the culture of the organization has been changed as measured by an ethics and compliance program that goes well beyond employees and extends to all third parties in their complex value chain, for example see Business Integrity Alliance.
- Allow shareowners not just to affirm the Citigroup’s auditor but to select the auditor through a varient of a system proposed by Mark Latham.
- Fund organizations to help retail voters gather information on proxy issues and vote intelligently such as ProxyDemocracy.org (see also the section on client directed voting in this letter to the SEC from Mark Latham) or facilitate their ability to assign their proxies to someone who will. See Glyn Holton’s Investor Suffrage Movement.
- Require Citigroup to adopt model proxy access bylaws as outlined by the United States Proxy Exchange.