The Frankowski Firm

Judge Accused of Exceeding Authority by Rejecting SEC Settlement

Trial Court Judge Jed Rakoff is accused of exceeding his authority in rejecting a settlement reached by the SEC and Citigroup. The settlement came after the SEC initiated a civil fraud action against Citigroup regarding the sale of a complex $1 billion mortgage bond deal during the end of the housing boom. The SEC also alleged Citigroup deceived its customers by selling them risky mortgages that the bank allegedly knew would decline in value. The clients involved suffered more than $600 million in losses.

Citigroup agreed to pay $285 million to settle the complaint, but Judge Rakoff rejected the settlement. According to the NY Times Dealbook article, Judge Rakoff called the proposed settlement amount “pocket change” for the bank. The Judge also wrote in his opinion, according to the article, that the settlement did not require Citigroup to admit to or the SEC to prove fraud, which deprived the public “of ever knowing the truth in a matter of obvious public importance.”

Judge Rakoff did not attend the proceedings at the United States Court of Appeals for the Second Circuit in Manhattan. His court-appointed lawyer did attend the argument in front of the three judge panel, regarding his authority to reject the SEC/Citigroup settlement. According to the article, John R. Wing, the lawyer for Judge Rakoff, argued that a judge is not bound to approve every consent decree from the SEC while only assuming the decree is in the public’s interest. Judge Rakoff wanted additional evidence to ensure his judgment was well informed.

Many governmental bodies use the “neither admit nor deny wrongdoing” language in settlement with corporate defendants. A worry addressed in the article is that if the Second Court of Appeals agrees with the Judge, than other judges would refuse to approve settlements with that language. Also, having to admit fault could be quite the deterrent to corporate defendants choosing to settle and more cases will go on to a costly trial. The NY Times Dealbook article quotes Brad S. Karp, a lawyer for Citigroup, as saying that, “Many corporations will decide to not settle matters if a requirement is to admit liability,” Mr. Karp said. “The federal regulatory enforcement regime would screech to a grinding halt.”

Judge Rakoff’s lawyers argued in response that, “The S.E.C.’s and Citigroup’s concept of deference — in which courts would be effectively reduced to potted plants — would surely undermine the independence of the federal judiciary.” The Courts need not approve every settlement that comes their way just because it was offered by a federal agency. Citigroup and the SEC argued that requiring an admission of fault would lead to more costly trials. However, approving all settlements without an indication of fault may be better for the defendant but their ease in settlement should not be favored over the public’s interest.

This is not the first time Judge Rakoff has rejected an SEC settlement. The article acknowledges that the Judge has been a vocal critic of the SEC and their settlements which allow a company to settle fraud case by paying a fine without having to admit any wrongdoing. Such settlements must be approved by the court to be “fair, reasonable, adequate and in the public interest.” Judge Rakoff, in 2009, rejected the SEC and Bank of America settlement related to the bank’s acquisition of Merrill Lynch. Other federal judges in Brooklyn, Colorado and Wisconsin have followed suit and demanded greater information and/or accountability from defendants approving settlements with the S.E.C. and other government agencies.


If you or someone you know has lost money as a result of an mortgage backed investment, please contact Richard Frankowski at 205-747-1903 to discuss your potential legal remedies.

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