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A Legal Scholar Overreaches From The Bench

Overworked judges across America try to clear their dockets by encouraging plea bargains in criminal cases and settlements in civil disputes. It’s unavoidable in a society that loves to litigate, and one that often prosecutes newly defined, or undefined, crimes.

Some thoughtful observers, such as Northern Illinois University’s Jeffrey Parness and Yale Law School’s Owen Fiss, have criticized the practice. They note, among other faults in this system, that when parties have greatly unequal resources, as is often the case with people accused of street crimes, pressures on the weaker party to settle can lead to unjust results.

U.S. District Judge Jed Rakoff seems to be persuaded. At least twice now, he has rejected settlements that he believed did not adequately serve the interests of the weaker party in the dispute. But in both cases, the weaker party was the United States of America, as represented by the Securities and Exchange Commission.

So who were the parties that threatened to fleece the globe’s last remaining superpower in Rakoff’s courtroom? Bank of America and Citigroup, two banking organizations that are regulated by, and not long ago required financial assistance from, that same superpower.

Rakoff rejected a proposed settlement between the SEC and Citigroup earlier this week. He declared in his decision that the proposed agreement was “neither fair, nor reasonable, nor adequate, nor in the public interest.” Rakoff scheduled a trial, over which he would preside, for next July. Rakoff rejected a similar settlement with Bank of America in 2009, later approving a revised agreement that was re-drafted to try to penalize the bank without hurting its shareholders.

Like some of the other settlement skeptics, Rakoff has first-rate academic credentials, including degrees from Swarthmore and Oxford, and a J.D. from Harvard Law. He has lectured at Columbia since 1988, and he has served as a federal judge in New York for 15 years.

But unlike full-time academics, who are at liberty to contemplate the legal world as they believe it should be, Rakoff’s duties as a sitting judge require him to accept the division of litigious labor as it actually exists. Congress charged the SEC, not Rakoff and other judges, with balancing Citigroup's alleged offenses among the SEC’s many other enforcement responsibilities.

Rakoff, whose field of view is limited to the case that is before him, may think the SEC and its attorneys have nothing more pressing to do next July than to present their case against Citigroup to him so he can know “the truth” that he found lacking in the settlement. But the SEC is not an arm of Rakoff’s court. For good or ill, it decided that a $285 million check to the government would be adequate recompense for Citigroup’s ostensible offenses in the run-up to the 2008 credit crisis. That check, after all, would come without the burden to the SEC of having to prove that Citigroup broke the law, or even that a law was broken, which is a statement that would be very much in dispute at a trial.

For its part, Citigroup concluded that it was worth $285 million to make the case go away, provided the payment is not accompanied by an admission of guilt that can end up costing the bank far more when other prospective plaintiffs step forward to use that admission against it. Rakoff called the $285 million “pocket change.” He must have some very big pockets, or else he thinks that a punishment should be proportionate to the wealth of the offender, rather than proportionate to the offense.

“If the allegations of the Complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business,” Rakoff wrote. Regardless of entity size, I would find – and I think many people would find – an unwarranted $285 million penalty to be neither mild nor modest. Most of us, after all, can afford a $100 speeding ticket. But if a patrolman ticketed you for speeding when you actually were driving at the legal limit, would you just consider this a mild and modest cost of using the public highways?

Rakoff’s rejection of this settlement was, simply, a gross overreach. He may disagree with the SEC’s settlement policies, but if he wanted to do something about them, he should have asked President Bill Clinton to appoint him to the SEC (a job that has a five-year term) rather than accept the limited policymaking powers that come with a lifetime appointment to the federal bench.

There is a good chance that, as in the Bank of America case, the SEC and Citigroup will try to re-craft their settlement to satisfy Rakoff without exposing Citigroup to additional liability to third-party plaintiffs. Rakoff’s desires notwithstanding, neither side is eager to go to trial in this case.

But the SEC could also decide to settle with Citigroup privately. The SEC would withdraw its suit, and Citigroup would pay the agreed penalty. The main difference would be that without a court injunction, the SEC could not claim to have reformed Citigroup’s practices on pain of contempt; the monetary penalty would have to suffice. If Rakoff cannot be satisfied, or if other federal judges follow his lead in other cases, I would expect this avenue to become the settlement vehicle of choice.

And if the Citigroup case goes to trial, should Rakoff be the presiding judge? His rejection of the settlement leaves the impression that he has already concluded that Citigroup is guilty of something; he sees the trial’s purpose as providing the specifics. I would expect Citigroup to move to have Rakoff recuse himself, and I would further expect Rakoff to refuse to do so. Not only would Citigroup face an unwanted trial before a hostile judge, but the SEC would face that equally unwanted trial in front of a judge whose decisions might well be reversed on appeal.

There are times when it is appropriate for a judge to consider the greater public interest. This is typically the case in class actions, in which a self-selected group of plaintiffs and their attorneys seek to represent other parties who are not present in the courtroom. Those absent parties rely on a judge’s finding for redress, and it is only right for a judge to consider their needs.

There are also certain cases where a judge will appropriately find that something is “against public policy.” For example, even if two parties agree privately to speculate on the length of someone’s life, the court will not enforce that wager.

This is not such a case. Congress has charged the SEC with enforcing the country’s securities laws. Citigroup, like all of us, is charged with obeying those laws. It is the SEC’s job, not Rakoff’s, to evaluate the magnitude of Citgroup’s alleged offenses and the SEC’s preparedness to prove those offenses in court.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s most recent book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book, Looking Ahead: Life, Family, Wealth and Business After 55.

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