By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance
FORTUNE – Federal Judge Jed S. Rakoff rejected the SEC’s proposed $285 million settlement with Citigroup on Monday. This rejection was significant beyond its clear rebuke of the SEC’s flimsy settlements, which have failed to address disclosure issues at big banks, allowing them to neither “admit nor deny” any wrongdoing.
The judge’s order sent a clear message to public officials and executives that they need to pay closer attention to the public interest. It’s remarkable that they would need to be told.
But arguing in support of its proposed settlement, the SEC had said that the public interest was not a criterion that Rakoff should consider. Citing legal precedent, Rakoff rejected the SEC’s argument and refused to approve the settlement, ordering a trial for July instead.
Rakoff's insistence that an opinion must be formed about whether the SEC settlement is in the public interest is pregnant with another possibility: this trial has the potential to force a solution that drives Citi (c) to act in the public interest as well.
The importance of the public interest to organizational health is an issue I tackled in my 2002 book, Economic Value Management: Applications and Techniques. Every organization has stakeholders integral to its success and survival. But organizations become weak when they do not address their fundamental relationship and value to the public interest and to their other stakeholders. Governmental entities lose their mandates. Corporations lose their reputations and valuable support.
Citi and the SEC may go to trial or they may try and formulate a better settlement, subject to Rakoff’s approval. In either case, Rakoff just might use this opportunity to reweave the public interest into the fabric of these two organizations.
Will that actually happen? Or will the SEC and Citi fight the basis of the order?
For all our sakes, let’s hope the public interest prevails.
Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.