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Document: Appeals Court RulingUpdated, 8:36 p.m. | Jed S. Rakoff is a maverick jurist who picked a three-year fight to make the Securities and Exchange Commission tougher on a Wall Street bank.
While Judge Rakoff of Federal District Court in Manhattan lost that fight on Wednesday, he had already secured a victory of sorts, having set in motion a series of events that swayed public opinion and influenced the S.E.C.’s broader enforcement agenda.
A federal appeals court on Wednesday overturned Judge Rakoff’s decision in 2011 to reject an S.E.C. settlement deal with Citigroup, undercutting the judge’s concerns that the bank got off with little more than a slap on the wrist. In a long-awaited opinion, a three-judge panel of the United States Court of Appeals for the Second Circuit concluded that Judge Rakoff “abused” his discretion “by applying an incorrect legal standard” to the case. The court sent the case back to Judge Rakoff, who is expected to eventually approve the deal.
The panel’s decision, which hands a win not only to Wall Street, but also to its federal regulator, will most likely rein in Judge Rakoff’s criticisms of S.E.C. settlements. For the agency, which came under fire from Judge Rakoff and others for settling without demanding admissions of wrongdoing, it is a moment of validation.
“Trials are primarily about the truth,” the appellate panel wrote in its opinion. “Consent decrees are primarily about pragmatism.”
No judge likes a higher court rebuke. But Judge Rakoff’s effort was not in vain.
His standoff with the S.E.C. inspired other judges to question a handful of securities cases. And to critics of Wall Street, the judge became something of a celebrity, a representative of the effort to crack down on Wall Street misdeeds. Rolling Stone declared him “a sort of legal hero of our time.”
The S.E.C., under its chairwoman, Mary Jo White, has pursued a course change of its own after Judge Rakoff’s decisions. Last year, the agency reversed its longstanding yet unofficial policy of allowing companies to neither “admit nor deny wrongdoing,” signaling that it would force admissions in particularly egregious cases.
“The Second Circuit can’t put the genie back in the lamp,” said Jill E. Fisch, a professor at University of Pennsylvania Law School who specializes in corporate law. “This opinion is not going to turn back the clock.”
Judge Rakoff was not alone in his concerns about the Citigroup case. In 2012, a federal jury rejected the S.E.C.’s case against a midlevel Citigroup employee, prompting the jury foreman to question “Why didn’t they go after the higher-ups rather than a fall guy?”
Known for his quick wit and iconoclastic views, Judge Rakoff did not contain his criticism to the Citigroup case. He also rejected an earlier S.E.C. deal with Bank of America. And when he finally approved that deal — after the regulator agreed to raise the fine — he still called it “half-baked justice at best.”
Outside the courtroom, the judge has been a thorn in the side of prosecutors. He recently wrote an article in The New York Review of Books that questioned why prosecutors never charged a top Wall Street executive over the financial crisis.
Lawyers who practice before Judge Rakoff, speaking on the condition of anonymity, noted that he was nothing if not lively. When taking the S.E.C. to task for filing an insider trading case against Rajat Gupta, a former Goldman Sachs director, in its own administrative court, a move criticized as forum-shopping, Judge Rakoff opened his ruling by remarking that “a funny thing happened on the way to this forum.”
“He is a bit contrarian and that is a good thing,” said Carl Tobias, a professor at the University of Richmond School of Law. “I think he relishes that to some extent.”
The Citigroup case, which captured the attention of Wall Street and the white-collar bar, proved to be one of Judge Rakoff’s biggest moments in the spotlight. As the financial industry faces a growing number of criminal and civil investigation, banks looked to that case as a barometer for the broader crackdown.
Unlike most judges who rubber-stamp settlements, Judge Rakoff rejected what he saw as a sweetheart deal for Citigroup, which the S.E.C. accused of duping investors into buying a complex mortgage deal during the waning days of the housing boom. The bank agreed to pay $285 million to settle the civil fraud case.
The judge, a former federal prosecutor and defense lawyer, called the fine “pocket change” for the bank.
Echoing broader concerns about the government’s response to the financial crisis and its pursuit of financial crime, he also took aim at the S.E.C.’s decision to allow Citigroup to settle the case without admitting wrongdoing, saying the parties deprived the public “of ever knowing the truth in a matter of obvious public importance.”
But the three-judge panel — Rosemary S. Pooler, Raymond J. Lohier Jr. and Susan L. Carney — concluded that it “is not within the district court’s purview to demand ‘cold, hard, solid facts.’ ” The appellate court instead outlined a checklist for judges to follow when weighing enforcement cases, saying they must “determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the public interest would not be disserved.”
The appellate ruling will have an immediate impact on another big case — the settlement of an insider trading lawsuit the S.E.C. filed against SAC Capital Advisors. Judge Victor Marrero, also a federal judge in Manhattan, raised concerns about the “neither admit nor deny” language contained in the settlement.
He approved the deal, but made his decision contingent on the outcome of the appeal in the Citigroup case.
The appellate court, while remanding the Citigroup case back to Judge Rakoff, did not require him to immediately approve the deal. The judge, the court ruled, may still pry loose additional disclosures from the S.E.C. and Citigroup.
“On remand, if the district court finds it necessary, it may ask the S.E.C. and Citigroup to provide additional information sufficient to allay any concerns the district court may have regarding improper collusion” between Citigroup and the S.E.C., the appellate court said in its ruling, written by Judge Pooler.
In a concurring opinion, Judge Lohier called Mr. Rakoff a “very able and distinguished” judge.
Judge Rakoff declined to comment on the ruling, as did Citigroup.
In a statement, the S.E.C.’s enforcement director, Andrew J. Ceresney, said he was “pleased with today’s ruling.” He added that “while the S.E.C. has and will continue to seek admissions in appropriate cases, settlements without admissions also enable regulatory agencies to serve the public interest.”
The prospect of wide-scale admissions initially alarmed Wall Street and the white-collar bar.
At oral arguments before the Second Circuit last year, Brad S. Karp, a lawyer for Citigroup and the chairman of Paul Weiss, seized on concerns about judges suddenly requiring admissions of wrongdoing. The admissions, in theory, could open the floodgates to shareholder lawsuits.
“The federal regulatory enforcement regime would screech to a grinding halt,” Mr. Karp said.
Judge Rakoff, who was appointed to the bench by President Clinton, is no stranger to bucking legal trends. In 2002, he ruled that the death penalty was unconstitutional. The judge — whose friends described him as a renaissance man, an Oxford graduate who spends his free time ballroom dancing — also questioned whether some of the government’s tactics in combating terrorism encroached on civil liberties.
And Judge Rakoff, a die-hard Yankees fan, surprised some New Yorkers when he declined to delay suspensions of four Knicks players during the 1997 N.B.A. playoffs.
“This court is sufficiently parochial,” he remarked at the time, “to wish that the Knicks be in every playoff in every round in every season.”
Michael Corkery contributed reporting.