November 29, 2011 / 10:18 PM / 7 years ago

Analysis: NY federal judge an outlier in challenging SEC

NEW YORK (Reuters) - Judge Jed Rakoff’s blunt rejection of a major Citigroup Inc (C.N) securities fraud settlement could resonate with other judges who share the public’s frustration with Wall Street and its regulators.

Rakoff is considered an outlier on the federal bench, a judge who rails against the U.S. Securities and Exchange Commission’s policy of settling almost all lawsuits without defendants admitting wrongdoing.

Courts have typically approved similar pacts between government agencies and corporate defendants with few questions.

But Rakoff’s order on Monday blocking the proposed $285 million settlement over the sale of toxic mortgage debt was a populist decision that could influence other judges.

This is the second time in two years that he has rejected a high-profile SEC settlement.

“It’s man bites dog. Judge bites agency,” said Professor Adam Pritchard, of the University of Michigan Law School. “You haven’t heard about this sort of thing before because it doesn’t happen.”

In striking down the SEC’s $33 million settlement with Bank of America (BAC.N) over its failure to disclose that it had authorized bonus payments to Merrill Lynch employees as part of its takeover of Merrill in 2009, Rakoff said it unfairly punished shareholders. He later approved a $150 million pact.

Some judges recently have made strong interventions in settlements, but not those involving allegations of securities fraud.

The 68-year-old Rakoff is known for his acerbic opinions and maverick style. He was appointed to the federal bench in 1995 by Democratic President Bill Clinton.

In Monday’s ruling, the Manhattan federal judge said Citigroup was getting off too easy by the settlement.

The pact would have required the bank to pay a $95 million fine, which Rakoff called “pocket change” for Citigroup, and give back alleged ill-gotten profit. He said the court would be a “handmaiden to a settlement privately negotiated on the basis of unknown facts” if he were to approve it.

Rakoff “does seem to be getting angrier” and had written an opinion “not just concerning this case,” said Professor Robert Hillman of University of California Davis School of Law. “It’s likely that some other federal judges will be influenced.”

Still, few judges are expected to mimic Rakoff’s signature style. “Maybe they’ll act in a more restrained way and maybe there won’t be some of Rakoff’s rhetorical flourishes,” Hillman said.


The white-haired, white-bearded Rakoff practiced law for 26 years, both as a federal prosecutor and in private practice, before he became a judge. He is a 1969 graduate of Harvard Law School and earlier studied English literature at Swarthmore College near Philadelphia, his home city.

In December last year, Rakoff assumed senior status, a form of semi-retirement for federal judges but does not prevent them from taking a full case load.

Rakoff has a history of bold rulings.

In a 2002 murder case, he declared the death penalty unconstitutional. The decision was reversed by the 2nd U.S. Court of Appeals, where Rakoff occasionally sits on panels in the federal courthouse in lower Manhattan.

Rakoff’s latest high-profile decision puts the SEC on the spot, said Boston University School of Law Professor Cornelius Hurley.

“If they appeal, they run the risk of having it being affirmed and that would be a problem for the SEC.”

He said the ruling “plays into the obvious frustration of the populace that companies are getting off with very inconsequential penalties and no findings of facts or law as to violations.”

In its complaint, the SEC accused Citigroup of selling a $1 billion mortgage-linked collateralized debt obligation, Class V Funding III, in 2007 as the housing market was beginning to collapse, and then betting against the transaction.

The SEC said the CDO caused more than $700 million of investor losses. One Citigroup employee, director Brian Stoker, was charged by the SEC, and is contesting those charges.

Citigroup and the SEC argue that their proposed accord is fair. The complaint against the bank “fully and accurately sets forth the facts that support our claims” and the basis for the proposed settlement, SEC Director of Enforcement Robert Khuzami said in a statement.

Federal courts have long had the authority to assess the terms of a settlement in certain cases — those brought as class actions, for instance. But Rakoff has led a spread of that authority into other areas of judicial enforcement.

“There is an increasing sense in the federal courts that if the court is being asked to exercise its powers in furtherance of a settlement, the court needs to have more authority over more terms of the settlement,” said New York University law professor Samuel Issacharoff.

That trend has spread outside of securities cases to other complex cases, he said.

After Rakoff’s 2009 rejection of an initial settlement between the SEC and Bank of America, for example, another judge in the same court, Alvin Hellerstein, rejected a pact in 2010 between an insurance fund and people who became sick after working at the World Trade Center site after the September 11 attacks.

Hellerstein refused to approve the proposed $657 million settlement until the parties lowered legal fees and provided the individual plaintiffs with a proposed dollar amount they would receive. He later approved a reworked $712 million deal.

The action was filed not as a class action but as a mass tort, a legal mechanism that does not historically include direct judicial authority in approving a deal.

“The judge’s involvement in approving a settlement that was between private parties, we felt was very, very unusual,” said Marc Bern, lawyer for the emergency workers.

The case is SEC v Citigroup Global Markets Inc, U.S. District Court, Southern District of New York, No. 11-07387.

Additional reporting by Aruna Viswanatha in Washington, D.C.; Editing by Ted Kerr

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