Corporate Enemy #1: Judge Jed Rakoff
U.S. district Judge Jed Rakoff last Monday sent corporate defendants running scared to their vaults of money after rejecting a settlement with the Securities and Exchange Commission (SEC).
The brazen decision from Judge Rakoff against Citigroup created blistering implications for corporations seeking to settle shady law suits without disseminating clandestine information that would make them look as bad as their business decisions. This is definitely bad news for the select group of companies that are nothing short of gold-standard in business ethics classes (no, really).
The settlement under scrutiny would have essentially allowed Citigroup to pay $285 million in damages for investments dating back to 2007, which generated $160 million in REVENUES while the actual investors LOST millions. An important stipulation of the settlement is that it allowed Citigroup to deny allegations made that the company had mislead and swindled investors about complex mortgage investments.
Further, Judge Rakoff has expressed that he will refuse signing anymore SEC consent decrees (essentially an agreement that permits the defendant to pay damages in exchange for withdrawing from the civil litigation without admitting guilt or wrongdoing) UNLESS the company identity (in this case, Citigroup) admits to wrongdoing (either illegal or unethical activity).
In his written ruling, Judge Rakoff incandescently said:
“[I]n 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.”
This statement, along with his decision on the settlement, is a breath of fresh air for the many that are critical of the bias, purchased decisions that both the courts and oversight entities (like the SEC) are often acquiesced into manufacturing. The precedence this case sets is an important one as the country tries to claw its way out of the recession and make sense of what really contributed to the “gyrations” that crippled economies globally.
But corporations like Citigroup aren’t the only ones concerned about the precedence this ruling sets.
The SEC is also scared.
The SEC uses consent decree to close approximately 90% of their lawsuits, enabling them to get the most bang for their buck in terms of personnel. Critics of Judge Rakoff’s settlement rejection say that since the consent decrees won’t be signed without admittance of guilt, companies will basically fight to the death in court to prevent a documented admission of guilt, which in turn would ruin their chances at fighting off class action lawsuits. Since the potential harm posed to companies is substantial, it makes sense for the companies facing suit to fight the cases with legions of high-priced lawyers instead of rolling over and taking the penalty.
This means more court time for the SEC, and the flourishing anxiety is about sheer numbers - that they don’t have the manpower to litigate the influx of cases.
As far as the SEC is concerned, it would be greatly out numbered and out resourced (smaller, decreasing federal budgets vs. some millions upon millions upon millions) to be a fair fight in the courts. This, in turn, would allow the corporate defendants to either eventually get off or log jam the courts so that the litigation takes years to complete. Either way, its bad news for the SEC, because the result for either of the situation is (1) the SEC loses place with the public and its own home within the Federal government or (2) still enables, and even possibly promotes, corporations to misbehave since the SEC will be concentrating so heavily on the litigation mess it’s already in and can’t afford the agents to investigate new activity.
As with many court decisions carrying heavy implications, we’ll see.
It’s adapt or die for the SEC, and the fat lady may be singing real, real soon.
