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Coming Attraction – Judge Rakoff vs. The SEC (Again)

One of the most exciting things that could happen in terms of SEC FCPA enforcement is for a future case to be assigned to Judge Jed Rakoff (S.D.N.Y.).

I have been highlighting for some time Judge Rakoff’s criticism of the SEC’s without admitting or denying settlement procedure.  See here for the “Facade of FCPA Enforcement” (at pages 946-955 discussing the SEC v. Bank of America case), here for Judge Rakoff’s comments in the Vitesse Semiconducter case in which he called the procedure (in existence since 1972) “a stew of confusion and hypocrisy unworthy of such a proud agency as the SEC” and here for general discussion.

On October 19th, the SEC announced here resolution of a (non-FCPA) enforcement action against “Citigroup’s principal U.S. broker-dealer subsidiary [for] misleading investors about a $1 billion collateralized debt obligation tied to the U.S. housing market in which Citigroup bet against investors as the housing market should signed of distress.”  “Without admitting or denying the SEC’s allegations,” Citigroup consented to settle the SEC’s charges by paying $285 million ($160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty).  As noted in the SEC’s release “the settlement is subject to court approval.”

That is where Judge Rakoff comes in.  As I commented in this New York Times article by Peter Lattman, given Judge Rakoff’s prior rulings, if anyone is going to rattle the SEC’s cage on its settlement procedures,  it would be Judge Rakoff.

Yesterday, Judge Rakoff issued an order (here)  convening a hearing on November 9th.  Among other questions Judge Rakoff wants answered at the hearing are the following (internal citations omitted). 

 “1) why should the Court impose a judgment in a case in which the S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?

2) Given the S.E.C.’s statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the S.E.C.’s charges are true? Is the interest even stronger when there is no parallel criminal case?

3) What was the total loss to the victims as a result of Citigroup’s actions? How was this determined? If, as the S.E.C.’s submission states,  the loss was “at least” $160 million … what was it at most?

4) How was the amount of the proposed judgment determined? In particular, what calculations went into the determination of the $95 million penalty? Why, for example, is the penalty in this case less than one-fifth of the $535 million penalty assessed in SEC v. Goldman Sachs?  What reason is there to believe this proposed penalty will have a meaningful deterrent effect?

5) The S.E.C.’s submission states that the S.E.C. has “identified … nine factors relevant to the assessment of whether to impose penalties against a corporation and, if so,  in what amount.    But the submission fails to particularize how the factors were applied in this case.  Did the S.E.C. employ these factors in this case?  If so,  how should this case be analyzed under each of those nine factors?

6) The proposed judgment imposes injunctive relief against future violations. What does the S.E.C. do to maintain compliance? How many contempt proceedings against large financial entitities has the S.E.C. brought in the past decade as a result of violations of prior consent judgments?

7) Why is the penalty in this case to be paid in large part by Citigroup and its shareholders rather than by the culpable individual offenders acting for the corporation?  If the S.E.C. was for the most part unable to identify such alleged offenders, why was this?

8  What specific “control weaknesses” led to the acts alleged in the Complaint?   How will the proposed “remedial undertakings” ensure that those acts do not occur again?

These same questions could be asked in nearly every SEC FCPA enforcement action and I can only hope that Judge Rakoff  will one day ask the same questions in the context of an FCPA enforcement action.”

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