Stephen Foley: Judge's rebuff of SEC's Citibank settlement shows he's no friend of the little guy, after all

 

US Outlook: Judge Jed Rakoff is not the man you think he is.

For those of you that don't know, he is the Manhattan judge who threw out the Securities and Exchange Commission's proposed $285m settlement with Citigroup, which was accused of misleading investors in one of those toxic mortgage structures at the peak of the US housing bubble. Citigroup was going to pay the cash, which included a $95m fine on top of the return of its ill-gotten gains, "without admitting or denying" the charge of negligence against it.

Judge Rakoff, self-styled friend of the little guy, said the money was a drop in the ocean for a Wall Street giant like Citigroup, and justice demands a proper trial to establish the bank's guilt. Cue cheers around the world. Finally... someone is standing up to the banks... Citigroup to be held accountable for its part in the market's downfall... Wall Street on notice its cosy relationship with the SEC must end... Well done, Judge Rakoff... etc, etc.

Except that this is completely the wrong way to look at what has just happened. Judge Rakoff's ruling, if it stands and if it becomes a legal precedent, changes the balance of power between Wall Street and its regulators all right. But in favour of Wall Street.

The part of the ruling that got quoted most this week was Judge Rakoff's injunction that "in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth". With these words, the judge clearly aligns himself with those who draw a straight line from moral turpitude on Wall Street to the present state of our economy, and who want to see banks and bankers in the dock.

But by my judgment, it is the banks that have most to gain from going on trial. If they really must choose between "admitting or denying" a regulator's charges against them, banks are going to deny, and not just because they believe they have done nothing wrong. Admitting wrongdoing opens them up not just to fines from the SEC but also to vast losses in civil cases brought against them by investors claiming to have been harmed by their alleged negligence or fraud.

Counter-intuitively, one of the things the SEC has on its side is the relatively small scale of the penalties it can extract. Fines can be up to the level of a bank's ill-gotten gains, but do not extend to clawing back investors' losses. The SEC won $285m from Citigroup, and $550m from Goldman Sachs before it, because the banks calculated these were manageable sums compared with the cost and risks of fighting the regulator in court. And that is what it is, a mathematical calculation. If a settlement came with an admission of legal wrongdoing, the calculation is turned on its head.

As a terrified SEC immediately realised, Judge Rakoff is attacking the modus operandi of regulatory enforcement in this country. The agency concentrates on winning pre-trial settlements because it is outgunned in terms of resources for fighting lawsuits in court. "Obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission [of guilt] when that relief is obtained promptly and without the risks, delay, and resources required at trial," the SEC enforcement director, Robert Khuzami, said.

With Republicans in Congress trying to starve the SEC for resources, the regulator will have to dramatically cut back on the cases it pursues, if they must all proceed to trial. The cheers, then, will come from Wall Street.

And there is something else. The SEC is winning settlements in cases where there simply was no fraud or negligence.

I'm sorry to report to the baying mob that there was far less criminality on Wall Street in the run-up to the credit crisis than is generally supposed. Greed, fear, stupidity and group blindness, yes, but not much illegality. Part of the reason for the dangerous complexity of mortgage finance was bankers' desire to get round the rules by legal means, rather than to break them.

Time and again, this has been the experience in court. Ralph Cioffi and Matt Tannin, two Bear Stearns hedge-fund managers, were acquitted by a jury in 2009 when the US government charged them with defrauding investors in their subprime mortgage-stuffed fund. Fabrice Tourre of Goldman Sachs, "Fabulous Fab" he called himself in emails, has been charged personally with the same fraud for which his employer paid that $550m settlement, but the SEC case looks shakier when his incriminating email quotes are read in their proper context.

And in October this year, a judge threw out charges against two State Street executives who the SEC alleged had committed fraud by failing to disclose the risks of the subprime bonds in their portfolio. The important point here is that State Street, making the usual calculation, has already paid $600m to settle nearly identical charges from the SEC and regulators in the state of Massachusetts, among others.

Executives, not just on Wall Street but in every regulated industry, routinely complain that they are hustled into settlements by publicity-hungry regulators, who know how corporations' legal departments do their calculations. These executives would have nodded approvingly at the following part of Judge Rakoff's ruling, in which he explains why he won't rubber-stamp the Citigroup settlement: "The injunctive power of the judiciary is not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts – cold, hard, solid facts, established either by admissions or by trials – it serves no lawful or moral purpose and is simply an engine of oppression."

So you see, Judge Rakoff is not the man you think he is. He is the regulator's enemy, the corporation's friend. Who's cheering now?

Suggested Topics
News
news

Emergency call 'started off dumb, but got pretty serious'

Sport
Erik Lamela celebrates his goal
football

Argentinian scored 'rabona' wonder goal for Tottenham in Europa League – see it here

News
The cartoon produced by Bruce MacKinnon for the Halifax Chronicle-Herald on Thursday, showing the bronze soldiers of the war memorial in Ottawa welcoming Corporal Cirillo into their midst
news
News
peopleFox presenter gives her less than favourable view of women in politics
PROMOTED VIDEO
Voices
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties
voicesLindsey German: The best way of protecting soldiers is to stop sending them into disastrous conflicts
News
The Edge and his wife, Morleigh Steinberg, at the Academy Awards in 2014
peopleGuitarist faces protests over plan to build mansions in Malibu
Property
One bedroom terraced house for sale, Richmond Avenue, Islington, London N1. On with Winkworths for £275,000.
property
Voices
Nigel Farage has backed DJ Mike Read's new Ukip song
voicesNigel Farage: Where is the Left’s outrage over the sexual abuse of girls in the North of England?
News
i100
Arts and Entertainment
Taylor Swift performs at the 2014 iHeart Radio Music Festival
musicReview: 1989's songs attempt to encapsulate dramatic emotional change in a few striking lines
News
Mario Balotelli has been accused of 'threateningly' telling a woman to stop photographing his Ferrari
peoplePolice investigate claim Balotelli acted 'threateningly' towards a woman photographing his Ferrari
Arts and Entertainment
Paul Anderson plays Arthur Shelby in Peaky Blinders series two
tvReview: Arthur Shelby Jr seems to be losing his mind as his younger brother lets him run riot in London
News
ebooksAn unforgettable anthology of contemporary reportage
Voices
Don’t try this at home: DIY has now fallen out of favour
voicesNick Harding, who never did know his awl from his elbow, is glad to see the back of it
Arts and Entertainment
Miranda Hart has called time on her award-winning BBC sitcom, Miranda
tv
Sport
Phil Jones (left) attempts to stop the progress of West Bromwich Albion’s James Morrison on Monday
Chelsea test can be the making of Jones and Rojo, writes Paul Scholes
Arts and Entertainment
Saw point: Bradley Cooper and Jennifer Lawrence in ‘Serena’
filmReview: Serena is a strangely dour and downbeat affair
Life and Style
The Zinger Double Down King, which is a bun-less burger released in Korea
food + drinkKFC unveils breadless meat beast
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

COO / Chief Operating Officer

Competitive (DOE): Guru Careers: A COO / Chief Operating Officer is needed to ...

SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

Chief Financial Officer

120-150k: Accountancy Action: We are looking for an experienced CFO from a min...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker