Here’s how an unhappy judge approves a Wall Street wrist-slapping


New York federal Judge Jed S. Rakoff has been the strongest voice on the bench for bringing Wall Street wrongdoers to justice.

So it isn’t surprising that when his masters on a federal appeals court ordered him to sign off on an indulgent fraud settlement with Citigroup Global Markets, he didn’t go down quietly.

“They who must be obeyed have spoken,” the 71-year-old judge wrote Tuesday in his order approving the deal he had earlier rejected. Nevertheless, he continued, because of the tolerant directive of the Court of Appeals, the federal government’s Citigroup settlement and others like it “will in practice be subject to no meaningful oversight whatsoever.”


Rakoff’s objections to the original settlement and his discontent with his marching orders from on high reflect his long-held viewpoint about justice on Wall Street and the courts’ role in enforcing it. In an essay for the New York Review of Books last year, he fired a broadside at the government’s hands-off treatment of Wall Street and banking fat cats in the aftermath of the financial crisis.

He was especially dismissive of the government’s habit of prosecuting corporations, but not their executives. “Companies do not commit crimes,” Rakoff wrote; “only their agents do...So why not prosecute the agent who actually committed the crime?”

By then he had made his mark as a skeptical reviewer of wrist-slap deals. In 2009, he tossed a $33-million Securities Exchange Commission settlement of a white-collar case with Bank of America, calling it “a contrivance designed to provide the SEC with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry.” The parties later agreed to a higher fine and stricter terms.

The Citigroup case, as we reported in June, involved an alleged mortgage security fraud that netted Citi an estimated $160 million. In 2011, the SEC and Citi reached a deal requiring the bank to pay $285 million, but leaving out any statement of the facts of the case.

When they brought the deal before Rakoff for his signature, he tossed it out. Not only was the penalty “pocket change” to Citi, he wrote, but without a recitation of the underlying facts, “the court becomes a mere handmaiden to a settlement privately negotiated ... while the public is deprived of ever knowing the truth in a matter of obvious public importance.”

He objected that his court risked “being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest....An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous.”


But the appeals court in New York thought Rakoff was being too tough on the little darlings. There, a three-judge panel lectured Rakoff that his only responsibility was to ensure that the deal was “legal,” “fair” and “untainted” by corruption or collusion, and that it resolved the complaint.

They informed him that it wasn’t his place to demand that the SEC “establish the ‘truth’ of the allegations.”

In bowing to their wishes, Rakoff mischievously, and perhaps tactlessly, questioned parts of their order via footnotes. Of the appeals judges’ observation that the SEC deserves deference because it’s “politically liable” if it fails to do its duty, Rakoff wondered aloud what they meant by that, since “the SEC by its charter, is designed to be free of political interference...and routinely asserts its independence.”

But he acknowledged that he had no choice but to go along. The appeals court, he concluded, “has now fixed the menu, leaving this Court with nothing but sour grapes.”

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