On Nov. 28, U.S. district judge Jed Rakoff rejected a $285 million settlement between the Securities and Exchange Commission and Citigroup.
In so doing, he essentially walked out of the federal courthouse on Foley Square and became the single loudest protester of all the protesters in Zuccotti Park.
In an unusually specific court order, Rakoff broke with decades of judicial deference to the federal government and suggested emphatically that banking regulators were enabling Wall Street’s efforts to hide allegedly “knowing and fraudulent” acts from the public.
While monumental on its face, the decision’s long-term effects more likely depend on the case’s future in the courts. It could immediately impose new standards of accountability and disclosure on an often too cozy system of financial oversight. As suggested in earlier posts (see “Related Posts“) de-regulation is simply political cover to lie, cheat, and steal from the American public………. so Bravo to Judge Rakoff!!
A Crucial Ruling
The case could very well become the definitive statement regarding Wall Street’s responsibility for the Great Recession.
When the housing bubble began to burst in 2007, Citigroup was blatantly promoting that potential investors purchase $1 billion worth of mortgage-backed securities it was selling. Furthermore it frequently promulgated that the securities were independently verified moneymakers.
However, Citigroup’s own filings later showed it had actually handpicked many of the assets thinking that they were going to lose money, according to SEC allegations filed with Rakoff.
Moreover, Citigroup went further and, in conflict with their fiduciary responsibility to their clients, bet against these same assets it had dumped onto unsuspecting clients, and in the process made $160 million, while the patsy investors who bought them lost $700 million, according to the SEC.
A Sweet Deal—But For Whom?
The SEC got Citigroup to agree to return the $160 million to investors with $30 million interest and accept a penalty of $95 million. In return, it let Citigroup avoid accepting or denying wrongdoing (though Citigoup contested the allegations in court). Citigroup was even allowed to deduct the $190 million swindled then repaid to the investors, from its taxes!
The SEC’s director of enforcement, Robert Khuzami, says pursuing a trial instead of settling “would divert resources away from the investigation of other frauds.”
Can you say, “A travesty-of-justice?”
Not everyone thinks that was inappropriate.
Congressional Republicans have proposed reducing the fees paid by Wall Street firms to fund SEC enforcement (surprised? I’m not).
Democrats and some Republicans, like George W. Bush’s first SEC chairman, Harvey Pitt, say the problem isn’t too much funding; it’s too little. “The SEC has been doing a phenomenal job,” says Pitt, despite being “woefully undermanned and underfunded.”
Judge Rakoff plainly states that transparency is the real issue. Some of the SEC charges against Citigroup were “tantamount to an allegation of knowing and fraudulent intent,” he wrote, yet the agency “chose to charge Citigroup only with negligence.”
By refusing to provide evidence to support the decision, Rakoff says that the SEC risks rendering the courts “worse than mindless” and a potential “engine of oppression.”
Strong words? Yes.
An understatement of the facts? No.
An understatement of the fraud committed upon the unsuspecting investing public. HELL NO!
The SEC or Citigroup could challenge Rakoff and appeal his ruling. More likely, they’ll try to rework their deal to meet his new, higher standards of public disclosure, or simply wait and hope that a more “business friendly” President or Congress will simply reduce the rules governing the oversight of banking transactions and the fiduciary responsibility of the institutions to represent their clients’ interest.
After all, there’s obviously no requirement for politicians to be truthful, nor represent their constituency; much less the best interest of the country.
We have come to expect business to operate in no one’s best interest but their own….but to betray their own clients and expect political cover to boot?
What a sad, sad state of affairs.