Judge strikes down SEC deal with Citigroup

David Gura Nov 28, 2011

Kai Ryssdal: One would like to think that when a government agency — say, the Securities and Exchange Commission — reaches a settlement with an accused wrongdoer — say, Citigroup — that settlement gets at and fixes what was done wrong in the first place. Since the financial crisis, the SEC has brought cases against a bunch of big financial firms, saying they misled investors by selling mortgage-backed securities they knew were likely to fail.

One such case, against Citigroup, was settled last month for $285 million. Today it was thrown out (PDF) because the judge said it wasn’t in the public interest. Essentially, that the SEC wasn’t interested in learning what Citigroup did wrong.

From Washington, Marketplace’s David Gura reports.

David Gura: The Securities and Exchange Commission has settled cases like this one for decades. And courts usually give them a rubber stamp. That’s why today’s ruling, handed down by Judge Jed Rakoff, stands out.

Edward Rock: The ruling we got today is unusual in general, but not unusual for Judge Rakoff.

That’s Edward Rock. He teaches securities law at Penn. He says Rakoff, like a handful of judges, has been uncomfortable with settlements.

Rock: The problem with settlements is you don’t get a full hearing on the facts. You don’t have a determination as to who was at fault, whether somebody violated the law or not.

Judge Rakoff argues the public deserves to know more. The SEC said today that the settlement was reasonable and would lead to changes in the financial industry’s behavior without time and money.

Jeffrey Manns, a law professor at George Washington University, says the SEC depends on settlements to do its job.

Jeffrey Manns: The analogy you should think about is plea bargaining in the criminal context. If every criminal defendant demanded their full constitutional rights to trial by jury, our entire criminal justice system would be swamped.

Manns says today’s ruling highlights a long-standing problem with the SEC.

Manns: The SEC is outgunned and outmanned. You have an agency of less than 4,000 people, called upon to oversee the entire financial sector.

If more judges rule like Judge Rakoff, that may force the SEC to take more cases to trial. That’d be easy for the financial services industry — it can pay top dollar for legal representation. But it’d be much harder for the SEC.

In Washington, I’m David Gura for Marketplace.

An official statement from Citi:

We respectfully disagree with the Court’s ruling. We believe the proposed settlement is a fair and reasonable resolution to the SEC’s allegation of negligence, which relates to a five-year-old transaction. We also believe the settlement fully complies with long-established legal standards. In the event the case is tried, we would present substantial factual and legal defenses to the charges.

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