What happens when a Federal agency like the SEC or FTC does not protect the public from massive corporate wrongdoing? Like the corporate wrongdoing on Wall Street? That is the Agency job, and sadly some agencies are like toothless dogs when it comes to nailing big corporations for wrongdoing. For as long as I can remember Courts have allowed Federal agencies to settle cases with huge fines and no admissions of wrongdoing. That is coming to an end. Admissions of wrongdoing help victims win civil suits so they are rarely made.
Congress has long known that the Agencies are very political: like the Fox guarding the hen house. A recent SEC decision to “settle” a corporate wrongdoing case puts this worry in the public spotlight.
An interesting case is pending in New York which arose from an abuse of mortgage backed securities. CITI knew it was sitting on a pile of worthless mortgages. To get rid of them they allegedly packaged them into a public offering and sold them as if they were golden. At the same time CITI shorted the securities. Investors lost $700 million. CITI made $160 million. Then the SEC stepped in and sued CITI for negligence. CITI and the SEC tried to settle the case by asking the Court to rubber stamp their out of court settlement.
The Federal court in New York, Judge Sal Rakoff, has apparently had enough and is not going to take it anymore, just like the famous line of Howard Beale from NETWORK.. How: he has bravely refused to rubber stamp a proposed dismissal of the SEC suit against Citigroup because it is not fair, not in the public interest, not reasonable and not adequate even though CITI would have to pay a $285 million dollar award to the SEC. To giants like CITI $285 million is in Judge Rakoff’s words like “Pocketchange.” Besides, how much is the truth worth? Priceless.
Judge Rakoff rebuked the SEC for its conduct, and then the SEC appealed his decision to not approve the settlement. Courts are rarely reversed for discretionary rulings so there is a lot at stake. What is at stake is at the core of our system of government: the ability of one branch of government (the SEC) to do what it wants without having to justify its decisions even though it affects millions of people, and billions of dollars.
I applaud all Federal and State court judges who are not allowing the honor and duty of the Courts to be muddied by Federal and State agencies. The Agency claims that they are providing deterrence rings hollow when the same wrongdoers are time and again caught red handed.
I hope this ruling will be affirmed on appeal or else the Court System will be seen as inferior to the whims of the Legislators and their appointees in the Federal bureaucracies. Finally, I further hope more Judges have the courage and wisdom to follow Judge Rakoff’s landmark decision.