Earlier this month, a federal appeals court reversed the 2011 ruling of U.S. District Judge Jed S. Rakoff, in which he refused to rubber stamp a deal between the U.S. Securities and Exchange Commission and Citigroup to settle civil charges of securities law violations. On their face, at least, the abuses alleged in the government’s complaint seemed to epitomize the greed-fueled frenzy that ushered in the financial crisis of 2008. And the proposed settlement—in which Citigroup Global Markets agreed to pay the S.E.C. $285 million in penalties and disgorgement—would have quietly put a lid on the allegations rather than having them aired out in court. The deal, moreover, would have permitted the bank to walk away without either denying or admitting any wrongdoing in the case.
As far as securities law “enforcement” went, this was business as usual. But Judge Rakoff wouldn’t have it. Instead, he fought for the public’s right to learn more about Citigroup’s behavior in the case. As he wrote eloquently in November 2011:
“The S.E.C.’s long-standing policy—hallowed by history, but not by reason—of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the . . . relief it is being asked to impose has any basis in fact. . . . In any case like this, that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.”
For that moral stand and others, we named Judge Rakoff as one of Fortune’s 50 World’s Greatest Leaders.
But Circuit Judge Rosemary Pooler, of the U.S. Court of Appeals for the Second Circuit, disagreed with Judge Rakoff’s ruling: “It is an abuse of discretion to require, as [Judge Rakoff] did here, that the S.E.C. establish the ‘truth’ of the allegations against a settling party as a condition for approving the consent decree,” Judge Pooler wrote.
As a result, it is nearly certain that Rakoff will now approve the S.E.C.’s settlement deal, after all.
In its complaint against Citigroup, the S.E.C. had accused the bank of negligently misrepresenting its role in structuring and marketing certain collateralized debt obligations, by failing to disclose to buyers that it had helped select the dicey subprime mortgages that backed them and that it would itself be shorting—betting against—these very CDOs.
While Rakoff’s legal stand has now been rejected, its moral power stands, in our view. And it would seem his cri de coeur has had a genuine impact as well. In June 2013, incoming SEC Chairman Mary Jo White, as one of her first official acts, pledged to seek more admissions of wrongdoing as a condition of settling cases of great public importance—a promise she has kept.
Tellingly, even before that, Rakoff’s frustration with the S.E.C.’s handling of this symbolic case had evoked remarkably parallel, heart-felt protests from eight jurors hearing civil court arguments against Brian Stoker, a midlevel Citigroup officer, whom the S.E.C. sued in relation to the same matter as above. In July 2012, a jury exonerated Stoker—but with an exceedingly rare and resounding asterisk. The jurors wrapped their verdict in a scrap of paper on which they wrote: “This verdict should not deter the S.E.C. from investigating the financial industry, review current regulations and modify existing regulations as necessary.”
In an interview with the New York Times, the jury foreman explained that the jury couldn’t understand why the S.E.C. had only charged a scapegoat like Stoker, instead of a top executive.
“I wanted to know why the bank’s C.E.O. wasn’t on trial,” he told the Times. “Citigroup’s behavior was appalling.”
