Federal District judge Jed Rakoff followed through with a smackdown of the Securities Exchange Commission on Monday, rejecting a settlement between the agency and Citibank that would have imposed a $285 million penalty on the bank without forcing it to admit wrongdoing for betting against mortgage securities that eventually cost investors hundreds of millions of dollars. Rakoff, whose approval was needed to finalize the deal, was not prepared to let Citi quietly slink away from what Wall Street critics allege to be the central crime of the financial crisis–mortgage securitization fraud–without airing the particulars of the case in a public forum. “In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives,” he wrote, “there is an overriding public interest in knowing the truth.”
Like his earlier remarks, Rakoff’s dramatically phrased decision was a rebuke of the SEC more than the banks, and his legal objection was to the SEC’s request for the court to approve the settlement without laying out the case itself. “In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found,” he wrote. “But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances…. for otherwise, the court becomes 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.”
Monday’s decision could have implications beyond Citibank. Settling out of court with no admission of wrongdoing has frequently been the SEC’s modus operandi in cases like this. If political momentum built in the wake of Rakoff’s ruling and other judges picked up his banner, Wall Street could face a level of scrutiny it has so far avoided.
Rakoff’s ruling is one small dose of exactly what Wall Street’s critics have been hankering for. The conflict between New York Attorney General Eric Schneiderman (along with Beau Biden, Martha Coakley and Kamala Harris) and lead negotiators of the 50-state mortgage fraud settlement (including the other state AGs and the Obama administration) is basically over whether securitization fraud cases will get swept under the rug. And you’d be hard pressed to find a realistic outcome more appealing to protesters hoisting ‘Jail the Banksters’ signs in Zuccotti Park than a public fraud trial for a major Wall Street institution and a rebuke to what Occupiers see as an overly sympathetic federal government. Judge Rakoff just gave them both of those things.