August 20, 2012
Law Professors Brief Supporting Rakoff Rejection of SEC-Citi Settlement
Posted by David Zaring

I've evinced skepticism about Judge Rakoff's decision to reject the SEC's $200 odd million settlement with Citi.  But other legal scholars differ - a group of 19, all of whom are substantially smarter than me, have just filed a brief in support of the district court ruling.  Jim Hamilton's blog has the details.  Basically, they're against the thing that appeared to bother the judge:


The SEC's practice of allowing defendants to settle allegations of serious securities fraud without any acknowledgement of facts in exchange for modest sanctions, which the present case illustrates, does not serve the public interest. The public has an interest in knowing the facts about how major financial institutions like Citigroup Inc. conducted their business in the period leading up to the financial crisis, even if the parties prefer not to provide such facts.


There's some nice observations here, and maybe they are worth unpacking.  First, was the fine a "modest sanction?"  Maybe, but the usual judgement here is whether it would be unreasonable for the agency to conclude that it fit the circumstances.  That's a tough standard to meet, although it certainly wasn't a huge fine, especially when you try to wrap your mind around the awesome churn and turnover that is Citi.  

What about the settlement without the admission of wrongdoing or statement of facts?  Most cases are settled without admissions of either of these things, after all, and so the question is whether cases that are settled by the government should be treated differently.

I generally prefer to not think of the government as engaged in a mission that private parties are not also engaged in - treating it as a radically different enterprise than a service provider like McKinsey or a goods provider like Apple can take you down the wrong kinds of roads (it makes it far too easy to dismiss the government as a useless rent-seeking foundry of incompetence, for one thing).  But of course, in some ways the government is different, and the brief makes good arguments on this score, arguments that may appeal to you.

  • The SEC is the monopoly power on capital markets enforcement, and maybe it should, as our agent in that field, be forced to explain its most important enforcement actions to us.  Without such an explanation, we will be unable to assess whether it is using the powers we have given it in the way we want.
  • The SEC is asking the court to use its special powers to provide ongoing oversight of Citi, without explaining to the court what Citi did to deserve such scrutiny, and a court shouldn't be expected to take extraordinary actions without knowing something about the facts underlying the request for such actions.

Me, I still would rather have the SEC mostly subject to the same sorts of rules as private litigants (who also request ongoing court supervision by the courts from time to time, and make decisions to settle lawsuits without shareholder gainsaying), but I think the brief gets to the crux of the issue behind the inclination to look more closely into the black box of enforcement deals.  It will be interesting to see if the Second Circuit responds.

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