A Legal Scholar Overreaches From The Bench

Overworked judges across America try to clear their dockets by encouraging plea bargains in criminal cases and settlements in civil disputes. It’s unavoidable in a society that loves to litigate, and one that often prosecutes newly defined, or undefined, crimes.

Some thoughtful observers, such as Northern Illinois University’s Jeffrey Parness and Yale Law School’s Owen Fiss, have criticized the practice. They note, among other faults in this system, that when parties have greatly unequal resources, as is often the case with people accused of street crimes, pressures on the weaker party to settle can lead to unjust results.

U.S. District Judge Jed Rakoff seems to be persuaded. At least twice now, he has rejected settlements that he believed did not adequately serve the interests of the weaker party in the dispute. But in both cases, the weaker party was the United States of America, as represented by the Securities and Exchange Commission.

So who were the parties that threatened to fleece the globe’s last remaining superpower in Rakoff’s courtroom? Bank of America and Citigroup, two banking organizations that are regulated by, and not long ago required financial assistance from, that same superpower.

Rakoff rejected a proposed settlement between the SEC and Citigroup (C) earlier this week. He declared in his decision that the proposed agreement was “neither fair, nor reasonable, nor adequate, nor in the public interest.” Rakoff scheduled a trial, over which he would preside, for next July. Rakoff rejected a similar settlement with Bank of America in 2009, later approving a revised agreement that was re-drafted to try to penalize the bank without hurting its shareholders.

Like some of the other settlement skeptics, Rakoff has first-rate academic credentials, including degrees from Swarthmore and Oxford, and a J.D. from Harvard Law. He has lectured at Columbia since 1988, and he has served as a federal judge in New York for 15 years.

But unlike full-time academics, who are at liberty to contemplate the legal world as they believe it should be, Rakoff’s duties as a sitting judge require him to accept the division of litigious labor as it actually exists. Congress charged the SEC, not Rakoff and other judges, with balancing Citigroup’s alleged offenses among the SEC’s many other enforcement responsibilities.

Rakoff, whose field of view is limited to the case that is before him, may think the SEC and its attorneys have nothing more pressing to do next July than to present their case against Citigroup to him so he can know “the truth” that he found lacking in the settlement. But the SEC is not an arm of Rakoff’s court. For good or ill, it decided that a $285 million check to the government would be adequate recompense for Citigroup’s ostensible offenses in the run-up to the 2008 credit crisis. That check, after all, would come without the burden to the SEC of having to prove that Citigroup broke the law, or even that a law was broken, which is a statement that would be very much in dispute at a trial.

For its part, Citigroup concluded that it was worth $285 million to make the case go away, provided the payment is not accompanied by an admission of guilt that can end up costing the bank far more when other prospective plaintiffs step forward to use that admission against it. Rakoff called the $285 million “pocket change.” He must have some very big pockets, or else he thinks that a punishment should be proportionate to the wealth of the offender, rather than proportionate to the offense.

“If the allegations of the Complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business,” Rakoff wrote. Regardless of entity size, I would find – and I think many people would find – an unwarranted $285 million penalty to be neither mild nor modest. Most of us, after all, can afford a $100 speeding ticket. But if a patrolman ticketed you for speeding when you actually were driving at the legal limit, would you just consider this a mild and modest cost of using the public highways?

Rakoff’s rejection of this settlement was, simply, a gross overreach. He may disagree with the SEC’s settlement policies, but if he wanted to do something about them, he should have asked President Bill Clinton to appoint him to the SEC (a job that has a five-year term) rather than accept the limited policymaking powers that come with a lifetime appointment to the federal bench.

There is a good chance that, as in the Bank of America case, the SEC and Citigroup will try to re-craft their settlement to satisfy Rakoff without exposing Citigroup to additional liability to third-party plaintiffs. Rakoff’s desires notwithstanding, neither side is eager to go to trial in this case.

But the SEC could also decide to settle with Citigroup privately. The SEC would withdraw its suit, and Citigroup would pay the agreed penalty. The main difference would be that without a court injunction, the SEC could not claim to have reformed Citigroup’s practices on pain of contempt; the monetary penalty would have to suffice. If Rakoff cannot be satisfied, or if other federal judges follow his lead in other cases, I would expect this avenue to become the settlement vehicle of choice.

And if the Citigroup case goes to trial, should Rakoff be the presiding judge? His rejection of the settlement leaves the impression that he has already concluded that Citigroup is guilty of something; he sees the trial’s purpose as providing the specifics. I would expect Citigroup to move to have Rakoff recuse himself, and I would further expect Rakoff to refuse to do so. Not only would Citigroup face an unwanted trial before a hostile judge, but the SEC would face that equally unwanted trial in front of a judge whose decisions might well be reversed on appeal.

There are times when it is appropriate for a judge to consider the greater public interest. This is typically the case in class actions, in which a self-selected group of plaintiffs and their attorneys seek to represent other parties who are not present in the courtroom. Those absent parties rely on a judge’s finding for redress, and it is only right for a judge to consider their needs.

There are also certain cases where a judge will appropriately find that something is “against public policy.” For example, even if two parties agree privately to speculate on the length of someone’s life, the court will not enforce that wager.

This is not such a case. Congress has charged the SEC with enforcing the country’s securities laws. Citigroup, like all of us, is charged with obeying those laws. It is the SEC’s job, not Rakoff’s, to evaluate the magnitude of Citgroup’s alleged offenses and the SEC’s preparedness to prove those offenses in court.

About Larry M. Elkin 525 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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