Jed Rakoff to SEC: Do you think I’m a tool?

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Judge Jed Rakoff has rejected the SEC’s proposed wrist slap of Citibank for selling mortgage-backed securities it knew to be of poor qualify.

Effectively, what he did was join this complaint with SEC’s complaint–filed at the same time as they filed the proposed Citi settlement–against a Citi employee, Brian Stoker, in which the SEC explicitly alleged that Citi knew what it was doing when it dealt shitty securities it intended to short. By doing so, Rakoff imposed the same trial process on this complaint as on Stoker. Effectively, he’s saying, “If you’re prepared to prove that Stoker knew what he was doing in selling shitty MBS, you’re prepared to prove that Citi did too.”

But the rest of his ruling focuses more generally on his demand that the SEC stop treating him–and federal judges generally–as tools of their efforts to cover over corporate crime. When he uses “tool” in this passage, I couldn’t help thinking he mean tool both literally, but also in the derogatory sense.

Without multiplying examples, it is clear that before a court may employ its injunctive and contempt powers in support of an administrative settlement, it is required, even after giving substantial deference to the views of the administrative agency, to be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest. [my emphasis]

After showing that Citi changed its mind, once it became clear Rakoff would be judging the issue, about the standard for judicial review in such cases,

In its original Memorandum in support of the proposed Consent Judgment, filed before the case had been assigned to any judge, the S.E.C. expressly endorsed the standard of review set forth by this Court in its Bank of America decisions, i.e., “whether the proposed Consent Judgment … is fair, reasonable, adequate, and in the publc interest.”

[snip]

In its most recent filing in this case, however, the S.E.C.
partly reverses its previous position and asserts that, while the Consent Judgment must still be shown to be fair, adequate, and reasonable, “the public interest … is not part of [the] applicable standard of judicial review.”

Rakoff then went on to argue that fact finding was necessary to serve the public interest, repeating his angry language about being used by the SEC.

Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt,3 the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public
importance.

3 The Second Circuit has described the contempt power as “among the most formidable weapons in the court’s arsenal.”

At which point he really starts to vent.

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts–cold, hard, solid facts, established either by admissions or by trials–it serves no lawful or moral purpose and is simply an engine of oppression.

Finally, in 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. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances. [my emphasis]

Now, I’ll leave it to the legal types to debate whether joining this case with the Stoker case helps Rakoff avoid having his decision reviewed by the Appeals Court. Assuming he succeeds, however, this will ultimately lead Citi to be faced with a whole slew of expensive lawsuits (Rakoff notes the investors are out $700 million).

But I’m also fascinated by his emphasis on the way contempt should play a role in such settlements. Perhaps that’s because–as he notes–the 2nd Circuit has found the SEC’s inclusion of a gag rule in settlement enforceable by contempt to be problematic in the past. Perhaps it’s tactical. I can’t help but think he’s itching to use that contempt power, however. As Rakoff points out several times in this ruling, Citi is a recidivist, and it knows the SEC itself is not going to enforce its promises not to engage in the same kind of behavior again.

[The proposed settlement] imposes the kind of injunctive relief that Citigroup (a recidivist) knew that the S.E.C. had not sought to enforce against any financial institution for at least the last 10 years,

So in addition to insisting on a result that will make it easy for victims of Citi’s crime to sue for justice, Rakoff seems intent on pursuing a result that will make it far easier for him to use his contempt powers against Citi directly.

And even more refreshing, Rakoff seems intent on forcing the truth to come out.

Update: Shorter SEC Enforcement Director Robert Khuzami: “Yes, I do think you are a tool.”

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28 replies
  1. rugger9 says:

    Looks like the GOP missed a few judges for their court packing. I also will note that some of their handpicked judges couldn’t stand the stench any longer.

    This is why the AG “settlement” that is still hanging around is so important for the banksters, they need legal cover from all of the lawsuits headed their way from stakeholders with legitimate claims [like the county recorders, note holders, home owners, etc., etc.] because precedent in many of those cases goes back centuries and were accepted practice before bankster greed became fashionable.

  2. Mary says:

    Shouldn’t someone tell him that some of the dc circuit judges are loudly and proudly proclaiming that a judge is NOT supposed to worry about facts and about resting rulings on facts, but is instead supposed to just take all exec branch unsupported allegations as virtually irrebutable?

  3. William Ockham says:

    Minor nit. You have a repeated clause in the quote:

    Without multiplying examples, it is clear that before a court may employ its injunctive and contempt powers in support of an administrative settlement, it is clear that before a court may employ its injunctive and contempt powers in support of an administrative settlement, it is required, even after giving substantial deference to the views of the administrative agency, to be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.

    Also, I think the judge definitely intended the double entendre in using the word “tool”.

  4. geoschmidt says:

    Isn’t it a prima facia contempt of the court, by the regulators, when they demonstrate an expectation that the court employ it’s police powers in something other than a response to a fact based finding?

    That the SEC, is weasiling around and innuending that the court go along and be “a tool.”

    Isn’t there some way to draw that into more than a suspicion, but an implied criminal overture?

    Glad the judge isn’t happy to oblige, but why not slap em down a call it contempt?

    I probable don’t get it, thanks anyway.

  8. Phil Perspective says:

    Update: Shorter SEC Enforcement Director Robert Khuzami: “Yes, I do think you are a tool.”

    Those quotes, from the AP article, really prove that Khuzami is the tool. One could ask how corrupt Khuzami really is.

  11. readerOfTeaLeaves says:

    @emptywheel: Wow, that AP article has some eye popping quotes (as does this post).

    Khuzami said in the SEC statement that Rakoff made too much out of the fact that Citigroup did not have to admit wrongdoing. He said forcing Citigroup to give up profits, pay fines and face mandatory business reforms outweigh the absence of an admission “when that relief is obtained promptly …

    …At the hearing, Rakoff questioned whether freeing Citigroup of any admission of liability could undermine private claims by investors who stand to recover only $95 million in penalties on total losses of $700 million.

    Shorter Khazumi: “Investors? who gives a sh!t about investors and savers? So what if they lose $695 million just because we don’t have the balls to go after criminal fraud?”

    Oh. My. God…

    Rakoff gives me hope. And since judicial pension funds are getting screwed along with the rest of us, here’s hoping a few more judges wake up and smell the… well, the sewerage emanating from SEC.

    Mamma mia…!

  14. rugger9 says:

    Discovery will be the best part. However, the PTBs will move heaven and earth to get this out of Rakoff’s courtroom and engage in some judge-shopping.

    B of A is a criminal enterprise, which stops at nothing to screw the people. Because they have the toxic assets [which in many cases, including from personal observation, they have hosed up themselves] they have been frantically trying to snag any sources of cash [hence the fees] to pay off the derivatives holders and CDOs. Because that rat hole is 4-5 times the size of the assets tied to them, it takes a lot of cash to fill it, and they won’t.

    The other way out is to cut their liabilities, on the backs of the innocents. As noted above, the pension funds and so forth that are required by law [at least in CA] to invest in the AAA-rated instruments are the ones being left out in the cold here.

    The big bankers need to go to jail for a very long time, but the SEC won’t do it.

  15. Peterr says:

    This decision shows the danger of trying to use the wrong tool for the wrong job. “A tool’s a tool” is a sure way to hurt yourself.

    As the SEC is finding out tonight.

  17. P J Evans says:

    @rugger9:
    BofA is also holding a lot of mortgages that are worth considerably less than their book value. They need fees to keep that rat-hole from becoming more obvious than it already is, too.

    I suspect that all of the TBTF banks are actually bankrupt, even with the bailouts. If they had to do honest accounting – and the SEC and the other regulators aren’t about to do that – they’d be gone already.

  18. readerOfTeaLeaves says:

    For anyone interested, the Guardian has a very nice report and some terrific quotations, including:

    Chicago-based securities attorney Andrew Stoltmann called Rakoff’s decision “historic”.

    “This is horribly embarrassing for the SEC. A federal judge is basically telling them to do their job,” he said.

    Stoltmann said federal judges have often been little more than a rubber stamp of approval for the SEC. “Imposing fines without admitting liability is a legal charade that has been going on for decades,” he said. “The SEC refuses to hold people’s feet to the fire and force them to admit liability. It just wants the headline and them to move on,” he said.

    http://www.guardian.co.uk/business/2011/nov/28/citigroup-sec-settlement-rejected-judge

    ‘Historic‘ has such a lovely ring to it…

  19. alinaustex says:

    Is Khuzami an Obama appointee – or is he from the previous administration ? Has Director Barr stepped down from her position yet ?
    If so who has replaced her ? Will the discovery from the MERS lawsuits in Delaware , Neveda ,& New York help Judge Radkoff in his pursuit of justice for the investors ? Has the enforcement budget for the SEC been restored under the current administration ?( As I recall under Chairman Cox the SEC enforcement budget was gutted .)
    This is very refreshing -most often – I like many other average Americans get ‘bumfuzzled” by the the financial jargon of this ongoing criminal conspiracy the banksters have inflected on us. But when Judge Radkof says he will not be used as a tool for the banksters to defraud investors – I get that – thank you Judge Radkof .

  20. masaccio says:

    Khuzami is an Obama appointee, and was heralded as part of the solution to weak SEC enforcement, largely because he came out of the industry.

    He has a strong enforcement background, and private sector experience in complex matters. I suspect he is following the old SEC playbook, and doesn’t see the problems with cutting deals like this in the eyes of the public, let alone Judge Rakoff.

  21. b2020 says:

    “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a [government] agency, even with the consent of the [governed]. If its deployment does not rest on facts – cold, hard, solid facts, established either by admissions or by trials – it serves no lawful or moral purpose and is simply an engine of oppression.”

    “[T]here is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found.”

    Judge Rakoff ever rule on state secrecy?

  22. shekissesfrogs says:

    Impressive words by the judge, and compared to your post, the apnews link puts the spin to cast the story against the judge IMO.
    The Robert Khuzami wiki page reads like a resume on his herculean efforts to clean up the SEC, and tells WAPO that only a crook can catch a crook. Formerly general counsel of Deutsche Bank NY- was hired by Richard H. Walker who later recommended him for the enforcement job at the SEC, a job he held once himself.

    [Gary J. Aguirre] describes [Kuzami’s] new program differently. Aguirre says it turns the SEC into a middleman between Wall Street firms and the Justice Department that will negotiate fines and circumvent a prison sentence.
    As Aguirre describes it, “First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC. Then the Justice Department commits itself to pass, so that the player knows he’s ‘safe.’ Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department.”
    Khuzami has been criticized for the new policy, which Republican Senator Chuck Grassley says the SEC’s own enforcement manual prohibits and the senator has asked for an explanation of Khuzami’s remarks.

    Who is Gary J. Aguirre? He went to work for the S.C.C where he

    became the lead investigator on an insider trading case involving Pequot Capital Management. Suspecting the leaked information came from John J. Mack, a Wall Street titan and major contributor to the 2004 campaign contribution of George W. Bush, Aguirre wanted to subpoena Mack, but supervisors told him Mack had too much “political clout” and would not be pursued. Aguirre complained to a superior about the preferential treatment being given Mack and was fired without warning.

    He won his case against the SEC for being fired illegally. Now..

    He represents Darcy Flynn, also an SEC whistleblower, who in summer 2011, was interviewed by staff from three congressional committees. He said that the SEC had destroyed thousands of records of preliminary investigations and that SEC investigators trying to pursue a case against Deutsche Bank were thwarted by Richard H. Walker, then SEC director of enforcement, who shortly thereafter, took a job at Deutsche Bank as general counsel.

    It’s nice that the SEC consults it’s former crooks for recommendations about who replace the them with.

    At the apnews link

    SEC Chairman Mary Schapiro, meanwhile, sent a letter to a key senator Monday asking for Congress to expand the agency’s authority to fine companies and individuals. She is seeking to raise the limits on fines under current law and make other changes.

    IKuzami’s program already breaks the rules in the manual, so what kind of changes does Shapiro want? Does she want to codify the coddling of banksters? She hired Kuzami after all.

  23. shekissesfrogs says:

    @readerOfTeaLeaves:
    It sure does have some eyepopping quotes that contradict the truth. I also noticed that paltry sum of the fine as compared to financial damage is left out.

    [The judge] called the settlement “neither fair, nor reasonable, nor adequate, nor in the public interest.”

    The SEC shot back in a statement issued by Enforcement Director Robert Khuzami, saying the deal was all four of those things and “reasonably reflects the scope of relief that would be obtained after a successful trial.”

    From above:

    In its most recent filing in this case, however, the S.E.C. partly reverses its previous position and asserts that, while the Consent Judgment must still be shown to be fair, adequate, and reasonable, “the public interest … is not part of [the] applicable standard of judicial review.”

  24. shekissesfrogs says:

    @shekissesfrogs:

    [Darcy Flynn] said that the SEC had destroyed thousands of records of preliminary investigations and that SEC investigators trying to pursue a case against Deutsche Bank were thwarted by Richard H. Walker, then SEC director of enforcement, who shortly thereafter, took a job at Deutsche Bank as general counsel.

    Richard. H. Walker should be in prison for racketeering- not recommending his cronies for Government enforcement positions. This makes me angry.

  25. shekissesfrogs says:

    “Today, Sen. Chuck Grassley (R-IA) threw his support to Rakoff, saying in a statement, “Judge Rakoff is right to ask for information. The SEC needs to provide a clear rationale for the enforcement penalties in this case and in others. Otherwise, the public is in the dark about whether the settlements are adequate and the court’s role is reduced to a rubber stamp. A settle and slap-on-the-wrist approach has not and will not deter the defrauding of investors.”
    http://t.co/9vf4zFjo

  26. keepon says:

    @rugger9:
    Then the Banks and the SEC should be taken all of one piece. Nothing bespeaks the SEC’s complicity in the RICO more plainly. Isn’t the one who drives the getaway car of equal guilt in the crime?

    Put them all on the barge to nowhere (without ipods, of course.) What sense does it make to be paying all these high salaries to Regulators who find it too cumbersome to regulate? (I believe these are the people that Mr. De Marco would pay more handsomely than the President of the United States for ‘what they do.’) WEED OUT the TREASON!

  27. rugger9 says:

    Slightly off topic, might be worth a post on its own, from FDL:
    http://news.firedoglake.com/2011/11/30/lps-whistleblower-turns-up-dead/

    Yves Smith has more. It reminds me of the computer guru involved in the OH hack of 2004, which the FAA has cleared in its incident report, but like that and the DC Madam, there are plenty of folks glad to avoid seeing these people in court on the witness stand. At some point the coinkydinks become statistically significant.

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