In its decision, a three-judge appeals court panel faulted Rakoff for appearing to overstep his authority, and for overlooking the possibility that Citigroup had done nothing wrong and would never have settled had it been required to admit liability.
Rakoff “believed it was a bad policy, which disserved the public interest, for the SEC to allow Citigroup to settle” without addressing the issue of liability, the 2nd Circuit panel said. “It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies.”
The panel also said requiring an admission of liability might even hurt the public interest, because it “would in most cases undermine any chance for compromise.”
And:
“We agree to settlements when the terms reflect what we reasonably believe we could obtain if we prevailed at trial, without the risk of delay and uncertainty that comes with litigation,” said Robert Khuzami, the SEC’s enforcement chief. “Equally important, this settlement approach preserves resources that we can use to stop other frauds and protect other victims.”
In his biting November opinion, Rakoff said that approving a settlement without knowing the underlying facts was wrong. “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” he wrote.
The judge also called the $285 million payout, including restitution and a $95 million fine, “pocket change” for the third-largest U.S. bank, and said by settling the SEC appeared more interested in a “quick headline.”
CARTE BLANCHE
Lynn Stout, a professor at Cornell Law School, called the 2nd Circuit’s response “somewhat shocking.”
“The 2nd Circuit appears to be giving the SEC carte blanche in deciding what is in the public interest in settling cases against financial institutions,” she said. “This is especially troubling as the SEC is a party itself to the settlement.”