Saturday, February 9, 2013

Judge Rakoff gets vigorous support in Second Circuit Appeal

The Times reports today on oral argument in S.E.C. v. Citigroup Global Markets.   The case has garnered much attention because District Judge Jed Rakoff refused to sign the order proposed by the S.E.C., saying that the Commission had not provided facts sufficient to support the proposed injunction.  
The judge asked questions of the sort that we have about the heedless pursuit of profit which so gravely injured our economy.  Among them were “What specific "control weaknesses" led to the acts alleged in the  Complaint How will the proposed "remedial undertakings" ensure that those acts do not occur again?  How can a securities fraud of this nature and magnitude be the result simply of negligence?” 
But rather than answer Rakoff's concerns the S.E.C. demanded that he show it "deference" - i.e. rubber stamp its settlement with Citigroup. Rakoff dismissed the $285 million settlement as "pocket change" for which the S.E.C. had not even extracted the price of an admission of fault in the allegedly fraudulent $1 billion "synthetic derivatives" deal in which Citigroup itself took a $500 million "short" position - betting against its own customers.. 
 If one thinks "rubber stamp" is unfair, take a look at the S.E.C.'s briefs which assert that in such cases judicial review is "at best minimal".   Except in rare circumstances the judge must "defer" to the agency.  Such a stance is an unconstitutional attack on judicial independence, Rakoff's court -appointed attorney John Wing argued in his brief. A securities scholars brief emphasized that Rakoff was exercising traditional equity jurisprudence to assure that the public interest is served by the proposed injunction.  A nicely framed brief by the attorney for Occupy Wall Street argued, persuasively in my view, that a proposed settlement with restraints in an enforcement action is not the sort of agency action for which "Chevron deference" to an expert agency is required.   The Securities and Exchange Act 15 U.S.C. 78u authorizes the S.E.C. to seek an injunction.  It does not eliminate the obligation of an equity court to probe the law and facts for a basis for the relief sought.
Former S.E.C. Chairman and General Counsel Harvey Pitt offers the Second Circuit a judicious way to resolve the matter.  Pointing to the hyperbolic arguments of the S.E.C. Pitt's brief  observes that the Commission did not attempt to respond to Judge Rakoff's questions - but rather sounded the alarm about such judicial defiance.  If the Commission had met the judge's questions directly and set forth the reasons it reached the compromise that it did with Citigroup  the SEC would  "promote transparency and improve public and judicial understanding of the impressive efforts expended by the SEC and its Enforcement Division to promote fairness in our nation’s securities markets."  It would be a pleasant surprise if the S.E.C. could produce such evidence. - gwc

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