A U.S. district court judge who declined to approve a regulatory settlement entered into by the U.S. Securities and Exchange Commission (SEC) with Citigroup Inc. back in 2011 has now, reluctantly, given the deal his blessing.
Judge Jed Rakoff, of the U.S. District Court Southern District of New York, initially rejected the SEC’s deal with Citigroup to settle allegations connected to the sale of certain mortgage-backed securities, saying that there was no way to assess whether it was fair, whether the penalty was appropriate, or if the deal was in the public interest. His ruling also called into question the use of no-contest settlements generally.
However, that initial decision was overturned in the U.S. Court of Appeals, and sent back to Rakoff’s court. Now, he has issued a new decision, endorsing the original settlement, saying in his judgement, “They who must be obeyed have spoken, and this court’s duty is to faithfully fulfill their mandate.”
He noted that the appeal court found that his initial ruling was mistaken, because the regulator and the firm are not required to prove that their deal is adequate, and that proving that it is “fair and reasonable” simply requires demonstrating that it is clear and lawful, resolves the case, and is not otherwise tainted. The SEC’s judgement in this area merits wide discretion, the appeal decision suggests.
In light of that ruling, Rakoff says that he can’t find that the proposed settlement is “procedurally improper,” or otherwise tainted. As a result, he has now approved the deal; but warned, “This court fears that, as a result of the Court of Appeal’s decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever.”
“But it would be a dereliction of duty for this court to seek to evade the dictates of the Court of Appeals,” he concludes. “That court has now fixed the menu, leaving this court with nothing but sour grapes.”