By Eleanor Bloxham
January 6, 2012

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

FORTUNE — Isn’t it ironic that the government agency responsible for enforcing a whole host of disclosure rules seems hell-bent on hiding the details of its own actions from public view?

A victory for lack of full, forthright disclosure was won by the SEC on December 27 when a federal appeals court approved an SEC requested delay in court proceedings. The delay effectively preempted Citigroup (C) from making disclosures regarding an SEC complaint against the bank — interestingly enough, for alleged disclosure failures.

The SEC’s muzzling of Citi followed an appeal the regulator filed two weeks earlier in response to a trial ordered by the lower court. Federal Judge Jed Rakoff had ordered the trial on the grounds that the SEC failed to provide enough information to justify its proposed settlement with Citi. In a December 29 supplemental order, Rakoff described the SEC’s lack of disclosure in the appeals process as “materially misleading.”

The upshot? The original complaint, which had been a fairly straightforward matter of Citi’s allegedly misleading its customers into buying mortgage securities, has morphed into a public spectacle in which both the SEC and Citi now stand accused of failing to provide relevant disclosures (in the case of the SEC, to the court and the public).

This isn’t the first time the SEC has accused Citi of failing to be sufficiently clear with its customers. As I wrote in October, Citi settled with the SEC in 2003, promising never to fail to properly disclose investment risks again. But the SEC argues that Citi has again misled its customers.

Nor is this the first time the SEC has been accused of failing to provide the transparency required by the courts to adequately vet a proposed settlement with a major bank. In an August 10, 2009 hearing before Judge Rakoff in a case involving alleged disclosure issues at Bank of America (bac), Rakoff responded to the SEC’s evasiveness by stating: “You are not going to be particularly effective with this court by telling me what I already know, namely, that you filed a rather uninformative bare bones complaint.”

One question Rakoff asked has been on just about everyone’s mind since the financial crisis: “So who …was responsible…were there human beings that wrote these documents…were there human beings who made the decision”?

The talk at that hearing in 2009 suggests that the SEC may not want its investigations open to public scrutiny out of fear that the regulator may end up looking sloppy at best and negligent at worst. At that hearing, the SEC identified two senior people at Bank of America that were primarily involved in relevant negotiations. The SEC said they knew they were involved because “we conducted an investigation. We spoke with the witnesses at issue…” But when the judge asked whether they took the testimony of the two individuals, the SEC said: “We, we have spoken with — I think we have spoken with one of them. We spoke with one of the witnesses.”

Beyond the adequacy of the SEC’s investigative skills and willingness to pinpoint those who are to blame, the courts need to review three issues:

  1. The inadequacy of the reforms required by settlements,
  2. The common lack of any real deterrence from future wrongdoing in these settlements, and
  3. The lack of SEC enforcement to ensure settlement reforms are enacted and maintained.

Fortunately, although these issues did not come up in the 2009 Bank of America-related hearing, they were raised by Rakoff in the Citi case. And these issues may soon receive a review in Congress as well. In an unusual mid-December display of bi-partisanship, the House Financial Services committee announced plans to hold hearings to address SEC settlement practices and “concerns about accountability and transparency,” according to Chairman Spencer Bachus.

The hearings will likely produce additional drama amid the backdrop of little faith in both regulators and large financial services firms. But hopefully they will do more than provide entertainment. Public companies and public servants have responsibilities to the public — and it’s time the public’s interest was served.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (, a board advisory firm.

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