U.S. appeals court endorses wrist-slaps for bank wrongdoing

U.S. District Judge Jed Rakoff, the federal judiciary’s most outspoken critic of court settlements that let Wall Street bankers off easy, has been slapped down again.

Rakoff, 70, was rebuked Wednesday by federal appellate judges in New York -- his judicial superiors -- for an “abuse of discretion” in rejecting a $285-million settlement the Securities and Exchange Commission reached with Citigroup in 2011.

The ruling may not turn federal courts into a rubber stamp for light corporate punishments, which has long been a concern of Rakoff’s, but it will give wrongdoing corporations somewhat more leeway in negotiating milder punishment from federal agencies.

The case at issue involved Citi’s alleged fraud in selling a mortgage security investment to customers. The bank pocketed an estimated $160 million from the fraud, according to the SEC’s original complaint.

But when the agency asked Rakoff to approve a settlement under which the bank would give up the $160 million and pay an additional $125 million in interest and penalties without admitting any wrongdoing, the judge cried foul.

Rakoff complained that his court risked “being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.” He was especially outraged at the absence of any findings of fact in the settlement. Without “some knowledge of what the underlying facts are,” he wrote, “the court becomes a mere handmaiden to a settlement privately negotiated ... while the public is deprived of ever knowing the truth in a matter of obvious public importance.”

In rejecting the settlement, he concluded, “an application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous.”

A three-judge panel of the 2nd Circuit Court of Appeals ruled, however, that he was out of line. A judge ruling on a proposed settlement reached by a regulatory agency, the appellate court ruled, has only four questions to answer: is the settlement “legal,” “fair,” and “untainted” by corruption or collusion, and does it resolve the complaint?

It’s not the judge’s role to “require, as the district court did here, that the SEC to establish the ‘truth’ of the allegations.”

The appeals judges told Rakoff to give the settlement another look. They said he shouldn’t be a rubber stamp, but he’d better follow the rules they laid down.

Consent decrees -- settlements in which the parties consent to be penalized, typically without admitting wrongdoing -- “are primarily about pragmatism,” the appellate judges advised him.

This is not the first time Rakoff has been overturned for his overly probing approach to legal settlements, and not the first time he has tossed a proposed deal out of his courtroom.

In 2009, he rejected a $33-million SEC settlement of a white-collar case with Bank of America, calling it “a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry.”

The parties later agreed to a higher fine and stricter terms. Since then, moreover, the SEC has said it will make settlements in which defendants skate without admitting wrongdoing harder to come by.

Late last year Rakoff fired an out-of-court broadside at the very idea of wrist-slap corporate plea bargains, especially those in which no individuals are brought to book. In an essay for the New York Review of Books, he was witheringly skeptical of prosecutions of corporations, which usually yield some nominal fines and an agreement that the company set up an internal “compliance” department. “The future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing.”

The 2nd Circuit’s ruling Wednesday means, in essence, that window-dressing may be all right, as long as it’s legal, fair, honestly reached and settles the case without too much mess.