Another judge blasts the SEC

Larry Ribstein —  17 August 2010

When the SEC announced its settlement with Citigroup a couple of weeks ago, I said:

The SEC has reached another peculiar settlement, this time $75 million from Citigroup, plus fines against executives. As with the Goldman settlement, Citigroup didn’t admit fraud, or even, as in that case, a mistake. Citigroup was accused of misleading investors about its exposure to subprime. The bank knew it was exposed to the housing market, but thought its senior tranches were safe. The misrepresentation concerned $37 billion and basically the life or death of the company. The fine was $75 million, which either ludicrously fails to match the misrepresentation, or suggests Citigroup didn’t really do anything wrong. If it didn’t do anything wrong, then why a fine? * * *And then there’s the problem that whatever was going on, Citigroup, or more accurately its shareholders, were getting hit for mere negligence of its executives * * *

I noted that the SEC settlement essentially boils down to questioning executives’ business judgment, and that it smacked of a politically motivated move to show the SEC was doing something about the financial meltdown.

The SEC defended the settlement by citing Judge Rakoff’s approval of the earlier SEC BOA settlement. But it forgot to mention that Judge Rakoff had thrown out the first version of that settlement as “half-baked justice” and “inadequate and misguided.”

Now the court reviewing the Citibank settlement is in the process of pulling a BOA. Here’s the WSJ article:

A federal judge refused to approve the Securities and Exchange Commission’s $75 million settlement with Citigroup Inc. over the bank’s disclosure of subprime-mortgage problems, saying she is “baffled” by the proposed pact. * * * The judge, striking a frustrated tone, fired several questions at the SEC, among them why it pursued only two individuals in the case and why Citigroup shareholders should have to pay for the alleged sins of bank executives. * * * “You’ve focused on two individuals and I can’t for the life of me figure out why,” the judge told the SEC lawyers. * * * The judge * * * suggested the [Citigroup executives] “could only be culpable if they knew” the size of the exposure.

The judge had some of the same problems I did. If there’s fraud, the settlement is inadequate. If none, why the fine? And in any event why should the shareholders be left holding the bag?

What it boils down to is that the courts are getting tired of playing political charades with the SEC.

Larry Ribstein


Professor of Law, University of Illinois College of Law

3 responses to Another judge blasts the SEC

    Richard from Houston 18 August 2010 at 8:24 am

    This one is relatively easy to answer. Under the new funding rules, the SEC gets to keep what it is able to collect in fines. This money then goes into hiring bigger staffs and empire building. So the SEC is encouraged to extort money out of US reporting companies. The DOJ is set up in a similar way. We are just beginning to see the obvious results of this–capital flight to jusrisdictions in which the rule of law is afforded more respect. I predict this capital flight will become a flood. The US is a hostile place in which to try and accumulate capital. Dozens of alphabet agencies try to plunder it.


    The SEC is a day late, a dollar short and grasping at straws on all this.

    Both Stanford and Madoff where handed to them and they did nothing. Now they basically manufacture cases against Goldman and Citi that aren’t anything but a politicall geared shakedown.

    I have to wonder what the heck the US citizenry has gotten for all the taxdollars that have gone into the SEC, OTS, OCC and dozens of other regulatory agencies. It sure hasn’t been competence.

Trackbacks and Pingbacks:

  1. Finger on the Pulse: From Our Blogroll and Beyond « The Legal Pulse - August 20, 2010

    […] While rejecting SEC’s settlement with Citigroup, judge wonders out loud, “You’ve focused on two individuals and I can’t for the life of me figure out why.” (The prescient Larry Ribstein at Truth on the Market) […]