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Dear Judge Rakoff: Thank You for Defending the Public Interest
Dear Judge Jed Rakoff:
I confess I’ve been a fan of yours for awhile now; you got my attention with the way you stood up to the SEC on its BofA deal. But your latest salvo against SEC facilitation of repeated securities fraud and its cooperation in stymieing investor lawsuits against its erstwhile defendants is breathtaking.
I mean, you really take a strong stand on defending the public interest, and that’s something tragically rare among our branches of government in recent years.
What’s so striking is both the obviousness of your position and its rarity. I mean, of course you can’t evaluate if a settlement is reasonable, fair, adequate or in the public’s interest if you have no clue what the underlying facts are. As you put it:
“Here, the S.E.C.’s long-standing policy—hallowed by history but not by reason—of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.”
And as you point out, the lack of facts not only affects your ability to assess the settlement, by structuring the deal this way the SEC is asking you to be complicit in keeping the truth hidden, to be
“…a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.
It’s hard to see the SEC’s recent series of settlements as anything other than an example of regulatory capture. As you colorfully noted, the SEC seems to get nothing but a “quick headline”, while Citigroup gets a “chump change” fine, and more important, the SEC’s cooperation in its defense against investor lawsuits. As you explain charging Citi with negligence and allowing it to settle without admitting anything is a “double blow” for defrauded investors hoping to recoup their losses. Since the fines that the SEC is collecting from Citi are much less than investors lost and aren’t even definitely going to be paid to investors, the SEC’s assistance with Citi’s defense against investors is particularly galling.
Relatedly, thank you for pointing out another example of the SEC’s deference to Citi–to the company’s face, in the complaint against Citi, the SEC pleads negligence. But against the low level employee, the SEC uses language like Citi “knew”. The SEC can’t have it both ways; either Citi was negligently fraudulent or knowingly fraudulent. Which, based on its “broad ranging four year investigation”, does the SEC really think is true?
Surely the revolving door between Wall Street and the SEC explains some of the regulatory capture. But another component has been the judiciary’s misplaced deference to the SEC in deals like these. Asking you to sign off on a deal because you ‘know’ the allegations are true though Citi won’t admit them, and in fact will loudly deny them in other litigation, is an inappropriate demand that you be complicit in assisting Citi’s defense against investor lawsuits. But that’s the demand the SEC has consistently made of judges for a long time, a demand, until your latest order, judges have acquiesced to.
Just whom does the SEC think it represents? It’s really not clear, given the SEC’s belated, craven claim that the public interest–as interpreted by you–is irrelevant to assessing the merits of its deal. You did a very nice job of smacking it over that move, but the fact that the SEC would make such an assertion is pretty amazing.
The SEC’s mission, according to its website, is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” How does a settlement that makes it harder for investors to recover losses due to securities fraud further the mission of protecting investors?
Similarly, the SEC has long recognized that accurate information available to all is the only way to have healthy markets; that’s the principle behind securities fraud, insider trading, and disclosure rules like reg FD. So why does the SEC think a settlement that hides the facts of the case from the public help “maintain fair, orderly, and efficient markets?”
The only good fact the SEC can plead to against its record of abysmal defense of the public against security fraudsters–recidivist ones at that–is that compared to the DOJ the SEC looks like an aggressive watchdog.
I hope that if your order is appealed, it stands, and trial goes forward as you’ve set it. Truth must out.
Thank you for being a public interest champion
Sincerely,
Abigail Caplovitz Field
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