Despite Reversal on Appeal, Judge Rakoff’s Denial of SEC-Citigroup Settlement Remains Influential

June 9th, 2014

In 2011, United States (US) District Judge Jed Rakoff delivered a path breaking decision that denied a settlement between the US Securities and Exchange Commission (SEC) and Citigroup Inc. The attempted settlement was the result of the SEC’s civil fraud charges alleging that Citigroup sold $1 billion of risky mortgage-linked securities in 2007 without disclosing that it was betting against those assets.


Judge Rakoff took issue with a term in the agreement that allowed Citigroup to neither “admit nor deny any wrongdoing.” He criticized the agreement for lacking clear reasoning behind its $285 million figure (which he called “pocket change” for Citigroup), and determined that the failing to resolve the bank’s guilt harmed the “public interest.”


Prior to 2011, courts were widely seen as rubber stamps for settlements by federal agencies. Judge Rakoff’s opinion motivated a series of other district court decisions similarly denying settlements by the SEC. Most significantly, SEC Chair Mary Jo White has changed the agency’s decades long policy by signaling that it would force admissions in certain egregious cases.


Last week, the 2nd U. Circuit Court of Appeals determined that Judge Rakoff abused his discretion by failing to give the SEC proper deference regarding its settlement with Citigroup. Writing for the Appeals Court, Judge Rosemary Pooler said that the truth of a bank’s guilt should be left to trials, and that “consent decrees are primarily about pragmatism.” This reversal likely paves the way for a lower court to approve the SEC-Citigroup agreement, and bolsters the SEC’s authority to determine the terms of future settlements. However, many commentators believe that despite being “bench slapped” by the circuit court, Judge Rakoff successfully sparked a public debate that has shifted the SEC’s enforcement agenda.


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