It is not hard to imagine what the reaction was like around the Securities and Exchange Commission offices when it was discovered that U.S. District Court Judge Jed Rakoff would be tasked with approving the agency’s settlement agreement with Citigroup over mortgage-backed securities fraud.
It was Judge Rakoff, after all, who took the unusual step in 2009 of blocking a settlement between the SEC and Bank of America over executive bonuses, writing in a scathing ruling that “all this is done at the expense, not only of the shareholders, but also of the truth” and adding that “it does not comport with the most elementary notions of justice and morality.”
It was Judge Rakoff who in 2010 called off a JP Morgan deal with a cable television operator, accusing the bank of violating, “at a minimum, the covenant of good faith and fair dealing,” and writing that the structure of the deal was “an end run, if not a downright shame.”
And it was Judge Rakoff who earlier this year decried the SEC’s “cavalier approach” to “forum shopping” when he rejected the agency’s motion to dismiss a lawsuit by Galleon Group managing director Rajat Gupta—after he was singled out among 29 other defendants to face an administrative hearing rather than a full trial.
(“A funny thing happened on the way to this forum,” the judge wrote, showcasing his trademark penchant for wordplay in opinion writing, lines now being quoted by his admirers as if they belonged in Bartlett’s. “The Securities and Exchange Commission—having previously filed all of its Galleon-related insider trading actions in this federal district—decided it preferred its home turf.”)
“[SEC chairwoman] Mary Schapiro must have been pulling her hair out of her head when she saw the case was going to Judge Rakoff. It was her worst nightmare,” said Christopher Bebel, a former counsel to the SEC’s enforcement division. “Judge Rakoff is clearly a guy on a mission to use his authority to bring a greater sense of integrity to the securities industries as a whole.”
But whether or not one judge—albeit over the course of several rulings—has the power to change the regulation of the financial sector, particularly enforcement by the SEC, is in dispute.
Ever since the Bank of America case, Judge Rakoff has been hailed as a dragon-slayer by Americans looking to hold someone on Wall Street accountable for the great crash of 2008. Last year, the Huffington Post suggested him for the Supreme Court; the Los Angeles Times described him as a one of the few figures in the country willing to “tap into the nation’s outrage.” Reuters blogger Felix Salmon wrote that “this crisis has thrown up very few heroes; Rakoff is one of them.”
“It wasn’t hard to see this coming,” said former New York governor Eliot Spitzer, who counts himself as one of Judge Rakoff’s admirers.
In October, Judge Rakoff handed out 18 questions to lawyers from the SEC and Citigroup, asking in an order, “Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud, but the defendant neither admits nor denies wrongdoing?”
And sure enough, last week, he found the consent judgment entered into between the agency and the bank to be “pocket change to any entity as large as Citigroup,” The settlement, which relied, as they often do, on the bank admitting neither guilt nor innocence to protect it from future civil lawsuits, had rendered the court a “mere handmaiden to a settlement privately negotiated on the basis of unknown facts.”
“In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers,” he wrote. “But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”
The judge threw out the settlement, and ordered the two parties to argue their sides in the full sunshine of an open courtroom. The trial is scheduled for this summer.
“Part of this seems like an offshoot of Occupy Wall Street, you know, where you are just mad at the bankers,” said Adam C. Pritchard, a law professor at the University of Michigan. “That just seems inappropriate on the part of the judge if that is what is going on. If the goal is to stick it to the bankers, that is not the judge’s job.”
Friends and colleagues of the judge’s say he is not the Lone Ranger some would cast him as.