NEW YORK — A federal judge in New York issued a stern
challenge to the government’s recent history of imposing “relatively
modest” punishments on big Wall Street banks for wrongdoing during the
financial crisis.
Jed Rakoff, a federal judge in
Manhattan, issued a sharply worded order Monday rejecting a proposed
$285 million settlement between the Securities and Exchange Commission
and Citigroup Inc. that would have allowed the bank to avoid admitting
it defrauded investors over toxic mortgage securities. He said that
other similar settlements had not stopped banks from breaking the law,
and added that the fines are “pocket change to any entity as large as
Citigroup.”
Rakoff’s order echoes public anger
that the banks have been let off too easily for their role in causing
the financial crisis that peaked in 2008. It also has the potential to
affect future fraud cases that the SEC enters into with Wall Street
firms that do not want to admit they violated the law — a key step that
helps shelter them from further civil litigation.
“He
wants them to dig deeper,” Anthony Sabino, a law professor at St.
John’s University, said of Rakoff. “What he’s looking for is for more
specific naming of names in order to protect the public from this
happening again.”
Rakoff has been a vocal critic
of SEC settlements, and has a history of shaking up the financial
industry after a career in the U.S. attorney’s office in Manhattan where
he prosecuted securities fraud. Analysts believe that his decision on
the Citi settlement will influence other judges grappling with similar
cases.
“Judge Rakoff is an extremely intelligent
and well respected judge, and therefore any judge would read what he’s
written,” said Marty Perschetz, a lawyer with the firm Schulte
Roth&Zabel.
In the Citi case, Rakoff must
approve any final settlement. He said in his order Monday that barring a
new settlement that meets his requirements, the two sides should
prepare to go to trial in July.
The SEC’s director
of enforcement, Robert Khuzami, said in a statement that the steps
called for by Rakoff would eat up the agency’s resources and time and
“would divert resources away from the investigation of other frauds and
the recovery of losses suffered by other investors.”
A
spokeswoman for Citi, Danielle Romero-Apsilos, said “in the event the
case is tried, we would present substantial factual and legal defenses
to the charges.”
The proposed settlement with Citi
is the latest in a long line of cases against Wall Street banks that
the SEC has sought to end with a negotiated settlement.
Last
year, Goldman Sachs Group Inc. paid $550 million to settle accusations
that it had misled its clients about the quality of mortgage-backed
securities that the bank sold before the financial crisis. JPMorgan
Chase&Co. paid $153 million to settle allegations in a similar case.
In both cases, in exchange for paying the fine, the banks were let off without admitting to the allegations.
The
SEC proposed a similar settlement with Citi in October after alleging
that the bank had sold its clients low-quality mortgage-backed
securities that the bank planned to bet against. The investors ended up
losing about $700 million from the deal while Citi made about $160
million.
Judges must sign off on such settlements
and have generally deferred to the SEC when the agency has asked for a
settlement, but Rakoff said such an approach has let the banks off too
easily and has denied the public its right to know what happened.
“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,”
Rakoff wrote.
This is not the first time Rakoff
has questioned a settlement between the SEC and a big bank. Most
famously, he criticized the agency’s willingness to settle with Bank of
America Corp. after the bank was accused of misleading investors about
its purchase of brokerage Merrill Lynch. In that case, Rakoff ended up
grudgingly signing off on the settlement.
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©2011 the Los Angeles Times
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