Should the SEC Try Cases or Settle Lightly?

Twice now, New York U.S. District Court Judge Jed Rakoff has refused to approve a settlement reached by the Securities & Exchange Commission. In the first case, Bank of America agreed to pay a $33 million fine without admitting it did anything wrong in hiding bonuses of $3.6 billion promised prior to its merger with Merrill Lynch. Judge Rakoff eventually approved a $150 million settlement, calling it “half-baked justice at best.”


Last month, Judge Rakoff did it again, this time refusing to approve a $285 million settlement with Citigroup concerning a $1 billion fraud that cost investors $700 million. In his decision, Judge Rakoff said he could not determine whether the settlement was “fair, reasonable, adequate and in the public interest,” because the SEC had not produced evidence of its fraud claims, and Citigroup did not admit doing anything wrong. He also pointed out that Citigroup is a frequent offender,

The SEC says it has to accept (sometimes paltry) settlement because it does not have the resources to fight Wall Street firms in court. Judge Rakoff points out that rolling over and taking those firms’ pocket change is contrary to the SEC’s statutory mission, which is to protect shareholders and prevent national emergencies caused by “sudden and unreasonable fluctuations of security prices and by excessive speculation on such exchanges and mar­kets.” Like the last three years.

Instead of fighting Wall Street, the SEC is taking its always-back-down strategy to the U.S. Court of Appeals for the Second Circuit. In other words, the SEC is fighting hard for the right to file lawsuits it never intends to see through to the end. But while the SEC’s strategy may allow it to settle more cases in the short term, without a meaningful threat of trial, exposure, and liability, why would any Wall Street firm pay more than pocket change? They wouldn’t, which is why the SEC’s strategy is a problem.

So why pursue such a strategy? Jesse Eisinger at ProPublica thinks the SEC’s biggest fear is going to trial and losing. That is probably right, but that doesn’t excuse a strategy that will ultimately render the SEC toothless. After all, as Eisinger points out, losing may not actually be the worst thing:

To overcome its greatest fear, the S.E.C needs to realize that it can win even if it loses. A trial against a big bank could be helpful regardless of the outcome. It would generate public interest. It would put a face on complex transactions that often are known only by abbreviations or acronyms. Litigation would cost the bank money, too. And it could cast the way Wall Street does business in such an unflattering light that even if the bank won, it might bring about better behavior.

A trial would show boldness. And when the S.E.C. found itself at the negotiating table again, it would feel a new respect.

(photo: Rick Kopstein)