SEC spins judge's words in defending Citigroup settlement
The SEC's argument to a federal judge about why she should approve the agency's proposed $75 million settlement with Citigroup goes something like this:
Another judge in another case with another bank said that judges should generally, but not always, defer to a regulator when it reaches a settlement with a company. Even if the settlement, as the judge called it in that particular case, was "half-baked justice" and "inadequate and misguided."
Judge Ellen S. Huvelle of U.S. District Court for the District of Columbia refused on Monday to accept the $75 million settlement between the SEC and Citi over allegations the bank hid nearly $40 billion in subprime exposure from investors. During a hearing, she asked a host of questions about the SEC's investigation into Citigroup and how the agency decided on the size of the penalty and on the individual executives who also face sanctions.
In withholding her approval, Huvelle was channeling Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York, who caused a lot of pain for the SEC late last year and early this year when he rejected a settlement the agency reached with Bank of America over allegations the bank hid important financial information from investors.
After the SEC added new charges, nearly quintupled the fine, provided voluminous additional documents to the judge and imposed additional sanctions, Rakoff reluctantly approved the settlement.
What's remarkable is that in trying to persuade Huvelle to endorse the Citi settlement, the SEC is embracing Rakoff's approval of the Bank of America settlement.
In a memorandum filed with Huvelle, the SEC cites Rakoff's approval order three times, more than any case it cites as precedent. But it leaves out the stinging words Rakoff used to describe the settlement.
For example, in its Citi memorandum, the SEC quotes Rakoff writing that "the law requires the Court to give substantial deference to the S.E.C. as the regulatory body having primary responsibility for policing the securities markets."
But it leaves out the passage that immediately preceded this comment: "So should the Court approve the proposed settlement as being fair, reasonable, adequate, and in the public interest? If the Court were deciding that question solely on the merits -- de novo, as the lawyers say -- the Court would reject the settlement as inadequate and misguided."
Also in the Citi memorandum, the SEC quotes Rakoff writing that "the Court would fail in its duty if it did not give considerable weight to the S.E.C.'s position."
But again, the SEC ignores the paragraph that came immediately before:
[T]he proposed settlement ... is far from ideal.... Its greatest defect it that it advocates very modest punitive, compensatory, and remedial measures that are neither directed at the specific individuals responsible for the nondisclosures nor appear likely to have more than a very modest impact on corporate practices or victim compensation. While better than nothing, this is half-baked justice at best.
And yet elsewhere in the SEC's Citi memorandum, the agency defends the $75 million settlement amount by comparing it to the court's approval of "a settlement that required Bank of America to pay a penalty of $150 million to be distributed to harmed shareholders in connection with proxy disclosure violations."
But once again, the agency leaves out Rakoff's opinion of the $150 million settlement:
The part of the proposed settlement that presents the greatest difficulty is, however, the penalty package, which essentially consists of a $150 million fine.... The amount of the fine appears paltry. An even more fundamental problem, however, is that a fine assessed against the Bank, taken by itself, penalizes the shareholders for what was, in effect if not in intent, a fraud by management on the shareholders.
In the end, perhaps the SEC would like Huvelle to channel Rakoff all the way, ultimately approving the Citi settlement -- but not before requiring of the agency months of pleading, new charges, additional fines and sanctions, and a much more thorough discussion of the investigative record.
Posted by: sseedragon | August 17, 2010 1:21 PM | Report abuse
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