The Thurgood Marshall U.S. Courthouse, home of the U.S. Court of Appeals for the Second Circuit, New York.
Photo by Heather Paul
Being a federal judge is a decent living, but it isn’t a ticket to join the Gates and Buffetts of the world. A U.S. district judge makes $199,100 today (after a large retroactive cost-of-living adjustment); back in 2011, the job paid $174,000.
So I was hardly referring to his federal paycheck when, in December 2011, I observed that U.S. District Judge Jed Rakoff must have very deep pockets. Rakoff had just rejected a proposed settlement between the Securities and Exchange Commission and Citigroup, characterizing it as “neither fair, nor reasonable, nor adequate, nor in the public interest.” Among other things, he called the required $285 million payment by Citigroup “pocket change.”
Rakoff refused to approve the consent judgment, and instead scheduled a trial. Both Citigroup and the SEC immediately appealed. Now the U.S. Court of Appeals for the Second Circuit, in New York, has reached the same conclusion I did in 2011: Rakoff overreached wildly.
In a unanimous decision, the three-judge panel found that the district court “abused its discretion by applying an incorrect legal standard in its review,” and remanded the case back to the district court for further action - very likely approving the deal, though the panel did not require it outright.
Thanks to the long delay, a new question has arisen. Namely, is the SEC, now under the leadership of Mary Jo White, still prepared to honor that original settlement? The SEC argued in the appeal that its discretion should be respected, which implied that it meant to honor the original agreement, though I would not necessarily read this as definitive. White has pressed for harsher terms and fewer settlements for banks, so it is not certain that the original deal is even still on the table. If it isn’t, Citigroup has been permanently damaged by Rakoff’s arrogance. If the deal still has a green light, Rakoff’s error nevertheless created needless delay and expense.
The Court of Appeals made many of the same points I raised at the time. The most pertinent is that the district court had no standing to demand facts from the SEC or a larger payout from Citibank before approving the proposed accord. The panel concluded that “there is no basis in the law for the district court to require an admission of liability as a condition for approving a settlement between parties.” As I did, the panel also drew a distinction between class action settlements, where “adequacy” is a concern judges must legitimately consider, and consent decrees proposed by the SEC, where application of such scrutiny is “particularly inapt.”
Settlements are about pragmatism. As such, it is up to the SEC whether or not to press for admissions of wrongdoing. If judges like Rakoff continue to second-guess the SEC, the agency can (the panel noted) avoid the courts altogether and fall back on its own powers. But if the SEC prefers to settle through the courts, then the agency opens the consent to judicial review. This review should include examination for fairness and reasonableness; it should not, however, require that one of the parties establish the absolute truth of the allegations. A settlement is a way to avoid a trial. It is not a mini-trial of its own.
Since the case is going back to Rakoff, it is possible he could continue to push for a revised settlement or more information prior to his new decision, though observers widely expect him to approve the Citigroup accord this time around. And while the SEC changed its policy in 2012 to limit deals that allow defendants to “neither admit nor deny” wrongdoing, the agency does not mean to jettison the practice altogether.
SEC Enforcement Director Andrew Ceresney said in an emailed statement that “while the SEC has and will continue to seek admissions in appropriate cases, settlements without admissions also enable regulatory agencies to serve the public interest by returning money to harmed investors more quickly, without the uncertainty and delay from litigation and without the need to expend additional agency resources,” Bloomberg reported.
In other words, both sides must compromise in a settlement, and the issue of admission of wrongdoing is one on which the SEC is still sometimes prepared to do so. Enforcing the securities laws is a role assigned to prosecutors and regulators, not to judges, whose function is to ensure that such enforcement is fairly applied and consistent with the statutes.
Rakoff’s power play may have satisfied his own sense of moral indignation. It certainly cheered the mob of scribblers and pundits who believe any punishment meted out to banks with tools other than a bayonet is probably too mild. Other countries actually have prosecuting judges who, like Rakoff, assign themselves the task of defining and investigating the alleged crimes tried in their courts. Our system, however, depends on the perception (and generally the fact) that our judges maintain strict neutrality between the parties, refereeing litigation without becoming participants in it.
Rakoff forgot his place in our system. If allowed to stand, his behavior would have undermined the federal courts as a venue for regulatory action. Fortunately, the appeals panel had the good sense to reject Rakoff’s display of judicial arrogance and to direct him to do the job he is paid $199,100 a year to do.