For refusing to bow to protocol when Wall Street firms break the law.
It’s frustrating enough that the financial crisis, which had its roots in a years-long orgy of greed and fraud on Wall Street, has resulted in no criminal prosecutions. Even worse, in some ways, is that civil cases brought by the Securities and Exchange Commission against big banks like Bank of America (BAC
), JPMorgan Chase (JPM
), and UBS (UBS
) -- the only enforcement actions that do
take place -- are routinely settled without those institutions being required to admit any wrongdoing. The practice is farcical -- what are the fines for, if no rules were broken? -- as well as demonstrably ineffective: A New York Times analysis
of cases from the last 15 years found at least 51 instances involving 19 companies in which Wall Street firms broke antifraud laws that they previously had agreed never to violate again.
In November, Jed S. Rakoff, a federal judge for the Southern District of New York, took a stand against this practice while presiding over a case of fraud allegedly committed by Citigroup. According to the SEC, Citigroup put together and sold to investors a $1 billion mortgage fund loaded with securities chosen for their likelihood to fall in value. The bank told investors that a separate entity had chosen the assets -- a lie -- and proceeded to bet against its customers, making $170 million when the investments indeed declined. The parties on the other side of the deal lost $700 million.
The SEC, which is loath to take on rich Wall Street firms in court, was happy to settle for a $285 million fine -- chump change when you’re Too Big to Fail. But Judge Rakoff wouldn’t have it, pointing out, quite logically, that he could not decide if the settlement was “fair, reasonable, adequate and in the public interest” without a conclusive determination of whether Citigroup had in fact committed fraud.
“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” the judge wrote
. “In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.”
Judge Rakoff’s vocal devotion to the truth was especially refreshing as an antidote to the kind of cynicism displayed by Citigroup’s fraud -- as well as the SEC’s timorous response. (The judge wondered in his opinion just what the agency was pursuing with the settlement, “other than a quick headline.”)
The SEC's director of enforcement released a public statement
complaining that Judge Rakoff's decision to block the settlement "ignores decades of established practice throughout federal agencies and decisions of the federal courts." He was right. It's exactly that ignoble tradition that Judge Rakoff rejected
, calling it "a long-standing policy, hallowed by history but not by reason."