Judicial SEC smackdown: what’s it all mean?


New York Federal District Court Judge Jed Rakoff triggered lots of headlines with his recent rejection of a settlement between the Securities and Exchange Commission (SEC) and Citigroup, in which the company admitted no wrongdoing and agreed to pay a fine the judge called “pocket change.” Matt Taibbi exulted at “one of the more severe judicial ass-whippings you’ll ever see,” detailing the sorry state of the SEC’s enforcement actions, in particular the repeated agreements by companies to “never do that again,” while all too often ending up back before the SEC on similar violations. Much of the day-after coverage had a similar focus on the wrist-slapping nature of most SEC settlement.

But as the dust settled, many commentators noted that the weak penalties doled out by the SEC may be attributed to its meager operating budget (which necessitates quick settlements over long, expensive trials), as well as to the challenges of proving malfeasance on the part of companies engaged in a business in which everyone recognizes that risks are part of the game.  Both of these reflections suggest that if the SEC pushed harder, it may have to trade a few high-profile trials for dozens of small-potatoes settlements.

Judge Rakoff rejected a similarly paltry SEC deal with Bank of America in 2009, but reluctantly approved a revised deal that raised the fine from $33 million to $150 million, though he called the final settlement, “half-baked justice at best.”

The clear solution is to give the SEC the resources it needs to dig deeper and push harder, including following through on legal charges when necessary and appropriate; the SEC’s slim staff and budget leave it relatively toothless in the face of a continuing supply of potential violations needing investigation and prosecution.

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Jim Cummings

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