Jed Rakoff to SEC: Do you think I’m a tool?
Judge Jed Rakoff has rejected the SEC’s proposed wrist slap of Citibank for selling mortgage-backed securities it knew to be of poor qualify.
Effectively, what he did was join this complaint with SEC’s complaint–filed at the same time as they filed the proposed Citi settlement–against a Citi employee, Brian Stoker, in which the SEC explicitly alleged that Citi knew what it was doing when it dealt shitty securities it intended to short. By doing so, Rakoff imposed the same trial process on this complaint as on Stoker. Effectively, he’s saying, ‘If you’re prepared to prove that Stoker knew what he was doing in selling shitty MBS, you’re prepared to prove that Citi did too.’
But the rest of his ruling focuses more generally on his demand that the SEC stop treating him–and federal judges generally–as tools of their efforts to cover over corporate crime. When he uses ‘tool’ in this passage, I couldn’t help thinking he mean tool both literally, but also in the derogatory sense.
Khuzami said in the SEC statement that Rakoff made too much out of the fact that Citigroup did not have to admit wrongdoing. He said forcing Citigroup to give up profits, pay fines and face mandatory business reforms outweigh the absence of an admission “when that relief is obtained promptly and without the risks, delay and resources required at trial.”
Khuzami added: “Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court.”
Of course, the policy of accepting settlements without any admissions serves various narrow interests of the parties. In this case, for example, Citigroup was able, without admitting anything, to negotiate a settlement that (a) charges it only with negligence, (b) results in a very modest penalty, (c) imposes the kind of injunctive relief that Citigroup (a recidivist) knew that the S.E.C. had not sought to enforce against any financial institution for at least the last 10 years, see SEC Mem. at 23, and (d) imposes relatively inexpensive prophylactic measures for the next three years. In exchange, Citigroup not only settles what it states was a broad- ranging four-year investigation by the S.E.C. of Citigroup’s mortgage-backed securities offerings, Tr. 27, but also avoids any investors’ relying in any respect on the S.E.C. Consent Judgment in seeking return of their losses. If the allegations of the Complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business.