December 3, 2011
Judge Rakoff and the Citigroup Settlement Rejection
A journalist asked me some questions via email regarding Judge Rakoff's rejection of the Citigroup settlement. (DealBook has the opinion, as well as an overview, here.) Here are a couple of my responses:
I believe Judge Rakoff’s obvious frustration with the SEC practice of routinely entering into these sorts of agreements where the other side neither admits nor denies any wrongdoing is part of a growing trend. One might even go so far as to see a connection to the Occupy Movement, which at least in part seems to be protesting a perceived “crony capitalism” wherein government regulates big business by way of wink-and-nod processes that leave both sides happy and the average citizen worse off. (I’m not alone in making this connection. Jonathan Macey had this to say at Politico (HT: Bainbridge): “The victory that Rakoff gave to the Occupy Wall Street movement Monday came from the federal courthouse — not far from Zucotti Park, the lower Manhattan headquarters of OWS.”; “Adopting the language of the Occupy Wall Street movement, Rakoff ruled that if judges do not have enough information on which to base their decisions, then the deployment of judicial power ‘serves no lawful or moral purpose and is simply an engine of oppression.’”)
I am somewhat ambivalent about the decision. On the one hand, I recognize that there are good reasons for entering into these types of settlements. Defendants like Citigroup have strong incentives to settle without admitting any wrongdoing in order to avoid those admissions being used against them in later private proceedings. Meanwhile, the SEC has strong incentives to settle because of the costs and risks inherent in litigation. On the other hand, while the agreements appear to make sense for the SEC and the defendants, it is much less clear whether they make sense for shareholders and the public. The SEC suggests that there would be much less money available to return to investors if its power to enter into these sorts of agreements were to be curtailed. One may question, however, whether the routine use of these agreements does not in some way foster more injury to investors and the public in the long run, since there is at least some message being sent to the alleged wrongdoers in these cases that they will avoid any meaningful personal penalty for similar conduct in the future. One particular issue that I think needs to be examined more closely is the public’s perception of these settlements. I have heard the SEC defend its practices in these cases by saying they support investor confidence. I’m not so sure about that, and if the SEC is making decisions based at least in part on that presumption it is something that should be empirically tested. Personally, I think the public has grown more and more suspicious of these deals—so I find that particular justification to carry little weight, if it doesn’t in fact cut the other way.
(1) These SEC settlements are no better or worse than the Class Actions which are "settled" for a nuisance payoff to the victims and a big payoff to the attorneys.
(2) The SEC in many ways is like the police in Clark County, Nevada whose job is to create an atmosphere of legality so that the professionals can go about their business of taking money from the amateurs. We might all be better off if the SEC were disbanded, and brokerages were required to put up a sign over their doors "Abandon hope all ye who enter here."
(3) The SEC might be a lot more effective at enforcement if it would really go after a few serious cases. Even if they lose some, they only need to send one ot two of these captains of the financial industry to jail to make the risk-reward factors a lot more conducive to good behavior. It's obviously their plan in insider trading cases, where the damage to the public is at best unclear and the "protect the apparent honesty of the system" motive of the enforcers most apparent. Why not use that same strategy to do something useful?
Posted by: Arthur Armstrong | Dec 4, 2011 9:55:47 AM