Judge Who Refused To Roll Over Overruled By Second Circuit


The US Court of Appeals for the Second Circuit overruled a decision by Judge Jed Rakoff of the District Court in Manhattan, according to a New York Times article written by Ben Protess and Matthew Goldstein (June 4, 2014).   Judge Rakoff’s decision from 2011 rejected a settlement negotiated between the Securities and Exchange Commission (SEC) and Citigroup.  The Second Circuit vacated his decision and sent the case back to Judge Rakoff, who likely will approve the deal.

In the deal, Citigroup and the SEC agreed on Citigroup paying a $285 million fine, but Citigroup did not have to admit to misleading investors about the toxic assets in a billion-dollar investment portfolio.  Judge Rakoff’s decision criticized the SEC’s settlement for not requiring an admission of guilt from Citigroup and charging the company a fine that paled in comparison to the damages it had caused.  Critics of Wall Street malfeasance celebrated Rakoff’s decision for bucking the trend of lenient enforcement against the banks that caused the 2008 financial crisis.

The majority opinion of the Second Circuit stated that Judge Rakoff abused his discretion when he insisted upon “cold, hard, solid facts, established either by admissions or by trials” in place of the non-admissions of guilt that had become the norm.  The Second Circuit reestablished a policy of judicial deference to regulatory agencies such as the SEC and then listed the factors for determining whether a settlement was “fair and reasonable.”

The case should mark an increase in SEC settlements now that the agency knows its decisions are entitled to judicial deference.  Judge Rakoff’s decision about the Citigroup settlement may not have survived, but its influence lives on.  The attention it brought to the SEC’s often toothless enforcement against the banks that defrauded investors is not going away.

Page Perry is an Atlanta-based law firm dedicated to protecting investor rights.