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2nd Cir Hears from Rakoff, SEC Regarding Settlements

By Robyn Hagan Cain on February 12, 2013 | Last updated on March 21, 2019

Will District Judge Jed Rakoff's controversial SEC settlement rejection set the tone for a bolder, badder judiciary?

In 2011, Rakoff blocked a settlement between the Securities and Exchange Commission and Citigroup over a mortgage-bond deal because the SEC didn't provide the court with facts "upon which to exercise even a modest degree of independent judgment." In the opinion, which described the $285 million settlement as "pocket change," Judge Rakoff noted that "there is an overriding public interest in knowing the truth," and the SEC "has a duty ... to see that the truth emerges."

Instead of disposing of the matter, Judge Rakoff ordered to parties to move forward with a trial.

Perhaps inspired by Rakoff's ruling, federal judges in Brooklyn, Colorado, Wisconsin, and Washington D.C. have since demanded greater accountability (or at least more information) before signing off on settlements with the SEC and other government agencies, The New York Times reports.

Gone are the days of the rubber-stamped settlement. But that trend isn't without its critics.

In March, the Second Circuit second-guessed Rakoff's order in the case, stating, "The court does not appear to have given deference to the SEC's judgment on wholly discretionary matters of policy ... The district court believed it was a bad policy, which disserved the public interest, for the SEC to allow Citigroup to settle on terms that did not establish its liability. It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies."

The SEC is challenging Judge Rakoff's consent judgment rejection with the Second Circuit Court of Appeals. Last week, attorneys for the SEC and Citigroup reiterated the deference argument. Meanwhile John Wing -- the attorney assigned to represent Rakoff -- told Judges Rosemary Pooler, Raymond Lohier Jr. and Susan Carney that the SEC and Citigroup had mischaracterized Rakoff as a judge gone wild. Rakoff only wanted additional evidence from the two parties so he could exercise his judgment. The New York Times reports.

According to Rakoff's attorneys, "The SEC's and Citigroup's concept of deference -- in which courts would be effectively reduced to potted plants -- would surely undermine the independence of the federal judiciary."

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