New S.E.C. Chair White should retreat, answer Judge Rakoff's questions - NJ Law Journal Editorial Board

S.E.C. chair Mary Jo White

The high profile confrontation between federal judge Jed Rakoff and the Securities and Exchange Commission presents an opportunity for former prosecutor and incoming S.E.C. chair Mary Jo White.  By following the lead of former chairman Harvey Pitt  Ms. White can demonstrate her independence from the financial giants she has been defending in recent years and affirm the integrity of the S.E.C. itself, the New Jersey Law Journal Editorial Board suggests.  The Commission's appeal of Rakoff's rejection of its proposed settlement with Citigroup of a $500 million fraud claim was recently argued before the U.S. Court of Appeals in New York. - gwc

A Second Chance for the SEC 

by the New Jersey Law Journal Editorial Board  [copyright ALM Media 2013 – all rights reserved]

March 28, 2013

 An early challenge for Mary Jo White as the new Securities and Exchange Commission chairman is how she handles SEC v. Citigroup Global Markets, a closely watched Second Circuit appeal from a judge's refusal to sign off on the SEC's proposed $285 million settlement with Citigroup.

U.S. District Judge Jed Rakoff dismissed the settlement as "pocket change," for which the SEC had not even extracted an admission of fault in the allegedly fraudulent $1 billion synthetic, collateralized-debt-obligation derivatives deal.

The judge asked the same sort of questions we do about heedless pursuit of profit that so gravely injures our economy. Among them: 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?

Rather than answer Rakoff's concerns, the SEC demanded that he show it "deference" — i.e., rubber-stamp its settlement. In its briefs on appeal, the SEC asserts that only minimal judicial review is warranted and that the court must defer to the agency. Rakoff's court-appointed attorney calls that an unconstitutional attack on judicial independence. And a securities scholars brief says Rakoff was exercising traditional equity jurisprudence to assure that the public interest is served.

Former SEC chairman and general counsel Harvey Pitt offers the Second Circuit a judicious resolution. In his brief, he observes the SEC did not respond to Judge Rakoff's questions but instead sounded an alarm about judicial defiance. If the SEC had met the questions directly and had set forth the reasons for its compromise with Citigroup, it 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," Pitt argues.

Five years after the financial crisis erupted, we are still waiting for transparency and evidence to persuade us that the SEC's efforts were indeed impressive. The new SEC chairman could send the right signal by taking Pitt's advice: Stop fighting Rakoff's demands and agree to answer his questions.

Board member Joseph Buckley recused from this editorial.