Taking a broad swipe at the Securities and Exchange Commission’s practice of allowing companies to settle cases without admitting that they had done anything wrong, a federal judge on Monday rejected a $285 million settlement between Citigroup and the agency.If you read the ruling, it becomes apparent that, for at least one federal judge, the incestuous relationship between the SEC and the Wall Street banks and firms it regulates is about to end. And that the truth behind the crimes committed on Wall Street, which have wrecked our economy and thrown millions out of work, should come out.
The judge, Jed S. Rakoff of United States District Court in Manhattan, said that he could not determine whether the agency’s settlement with Citigroup was “fair, reasonable, adequate and in the public interest,” as required by law, because the agency had claimed, but had not proved, that Citigroup committed fraud.
As it has in recent cases involving Bank of America, JPMorgan Chase, UBS and others, the agency proposed to settle the case by levying a fine on Citigroup and allowing it to neither admit nor deny the agency’s findings. Such settlements require approval by a federal judge.
While other judges are not obligated to follow Judge Rakoff’s opinion, the 15-page ruling could severely undermine the agency’s enforcement efforts if it eventually blocks the agency from settling cases in which the defendant does not admit the charges.
The [SEC] in particular, Judge Rakoff argued, “has a duty, inherent in its statutory mission, to see that the truth emerges.” But it is difficult to tell what the agency is getting from this settlement “other than a quick headline.” Even a $285 million settlement, he said, “is pocket change to any entity as large as Citigroup,” and often viewed by Wall Street firms “as a cost of doing business.”
According to the Securities and Exchange Commission, Citigroup stuffed a $1 billion mortgage fund that it sold to investors in 2007 with securities that it believed would fail so that it could bet against its customers and profit when values declined. The fraud, the agency said, was in Citigroup’s falsely telling investors that an independent party was choosing the portfolio’s investments. Citigroup made $160 million from the deal and investors lost $700 million.
What Citigroup did is made simple to understand in this Matt Taibbi analogy: let's say you decide to cut the brake lines on your car (sub-prime mortgages, credit default swaps) and sell it to your neighbor (investor). As your neighbor drives away, you then take out a life insurance policy on him. As he speeds off a cliff (Great Recession) and dies, it's a win, win all the way around (except for your neighbor-investor who, of course, is dead).
Once the police (SEC) investigate, they decide not to arrest you, but fine you. You agree to the proposed settlement (consent judgment), pay a portion of the life insurance proceeds to the police (SEC), and never admit any wrongdoing. Those are the "costs of doing business."
Thankfully, Judge Jed Rakoff gets the outrage at merely "slapping on the wrist" this kind of criminal behavior.
In his decision, Judge Rakoff called Citigroup “a recidivist,” or repeat offender, for having previously settled other fraud cases with the agency where it neither admitted nor denied the allegations but agreed never to violate the law in the future.
Citigroup and other repeat offenders can agree to those terms, the judge said, because they know that the commission has not monitored compliance, failing to bring contempt charges for repeat violations in at least 10 years.
“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” Judge Rakoff wrote. “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.”
You really owe it to yourself to read both Matt Taibbi's blog post about this, and the judge's 15 page ruling itself, which quite frankly is a tour de force of outrage that so many of us have been expressing (and which the OWS protests are crystallizing) for years now. From Judge Rakoff's ruling:
A consent judgment that does not involve any admissions and that results in only very modest penalties is just as frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies. This, indeed, is Citigroup's position in this very case.
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, 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, but also avoids any investors' relying in any respect on the S.E.C. Consent Judgment in seeking return of their losses.
Go back to my example above: let's say your neighbor's wife tried to sue your for wrongful death, fraud, etc. The only evidence she could use would be the official police report (SEC investigation). Under the terms of this consent judgment, that report would contain no evidence or admission of wrongdoing, and therefore could not be used against you in the future. It would leave the grieving widow (defrauded investors), in the words of the judge, "substantially short-changed."
Last word from Rakoff, and these words should be branded onto the foreheads of every judge and court that are hearing cases regarding Wall Street and its crimes:
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. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances.
Stop the propaganda, stop disappearing the evidence, stop letting these thieves get away. It's time for the courts to follow this judge's lead and get to the truth, and put these people in prison.