U.S. Judges Sound Off on Bank Settlements

U.S. Judges Sound Off on Bank Settlements

By BINYAMIN APPELBAUM
Published: August 23, 2010

WASHINGTON — Everything was rolling along traditional lines. A bank broke the rules. The government found out. The company agreed to pay a fine and improve its behavior.

And then the judge assigned to approve the deal blew his top.

In a scene that is becoming increasingly common, Judge Emmet G. Sullivan of Federal District Court chewed out federal prosecutors at a hearing in Washington last week for a proposed settlement with Barclays.

“Why isn’t the government getting tough with banks?” he asked.

Just one day earlier in the same courthouse, Judge Ellen Segal Huvelle refused to sign a settlement between the government and Citigroup, demanding, “Why would I find this fair and reasonable?” She ordered government lawyers to return with answers next month.

The scoldings from the bench are a striking departure from a long tradition of judicial deference to settlements formulated by federal agencies, reflecting broad disenchantment not just with Wall Street, but with its government overseers.

It is a pattern that began last year, when Judge Jed S. Rakoff of Federal District Court in Manhattan denounced the Securities and Exchange Commission for going easy on Bank of America, which the agency had accused of misleading its shareholders.

“The courts are staking out a role that frankly we seem to need,” said Jill E. Fisch, a law professor at the University of Pennsylvania. “They are standing in for the general public, the public interest, and demanding more” from regulators.

The immediate impact, however, has varied. Courts have limited power over settlements. Judge Rakoff persuaded the S.E.C. to punish Bank of America with a larger fine, but Judge Sullivan gave grudging approval last week to the deal between the Justice Department and Barclays after airing his concerns for a second day.

Experts also disagree about the long-term consequences. Some, like Professor Fisch, expect regulators to seek more punitive settlements. Others said that agencies instead would favor lenient penalties that do not require judicial review.

M. Todd Henderson, a law professor at the University of Chicago, said the impact would be determined by the public’s reaction.

“I think it’s a public relations stunt more than anything else,” Professor Henderson said. “The court is trying to make it public that the government may be cutting cozy deals, because it is the public that ultimately controls the executive branch,” which includes the Justice Department and the S.E.C.

Litigants are generally free to settle cases on agreed terms, but the law grants judges a narrow mandate in some cases to reject settlements that they believe do not serve the public interest. In the cases at hand, the judges expressed concern that the government was claiming victory without holding companies properly accountable — an approach Judge Rakoff described last year as creating a “façade of enforcement.”

The Barclays settlement, which Judge Sullivan approved last week, involved charges that the British bank helped customers in Iran, Cuba and other sanctioned nations move more than $500 million into the United States, breaking federal law — and undermining national policy — for more than a decade. The bank distributed instructions to employees for circumventing internal controls, for example by obscuring the source of the transfers.

Moreover, employees knew the transfers were illegal.

The cover sheets “must not mention” the offending entity, which could cause the funds to be seized, one employee wrote in an e-mail quoted by prosecutors. “A good example is Cuba, which the U.S. says we shouldn’t do business with but we do.”

The Justice Department agreed not to pursue criminal charges against the bank. In exchange, Barclays admitted to wrongdoing, forfeited $298 million and agreed to improve employee training.

Justice defended the settlement as a “serious sanction,” and said it did not seek a larger fine because Barclays had disclosed the crimes and cooperated with prosecutors.

“The public looks at this and says, you know, they’re getting a free ride here,” Judge Sullivan told government attorneys last Wednesday. He said he agreed to approve the settlement despite his concerns because it is not his job to supervise the department.

Under the terms of Citigroup’s proposed settlement, which Judge Huvelle has questioned, the bank would acknowledge concealing from shareholders the extent of its investment in subprime mortgages, which totaled more than $50 billion in 2007. The chief financial officer at the time, Gary L. Crittenden, told investors that the bank’s exposure totaled only $13 billion.

The S.E.C. calculated that the company realized an economic benefit of up to $123 million from its misrepresentations, but proposed to settle for a fine of $75 million.

“You expect the court to rubber stamp, but we can’t,” Judge Huvelle said.

Judge Rakoff told an audience at Stanford in June that he hoped other judges would follow the example that he set last year in the Bank of America case.

That case, he said, “may enable some of my colleagues to be a little more proactive in assessing S.E.C. settlements in the future.”

“I like to think that it will contribute to greater justice.”

But David S. Ruder, chairman of the S.E.C. in the late 1980s, said that regulators were in a better position to determine the fairness of a settlement because they commanded both the specifics and context of each case.

“It’s my view that by and large the judge ought to give great deference to the judgment of the agency as to what’s the appropriate punishment,” said Mr. Ruder, now a law professor at Northwestern University.

The three judges, all appointed to the district courts by President Bill Clinton, have shown particular frustration with the government’s failure to punish individuals.

Judge Rakoff repeatedly questioned the S.E.C.’s decision not to bring charges against the Bank of America’s executives. The agency described their conduct as negligent but not fraudulent. The New York attorney general, Andrew M. Cuomo, has since filed civil fraud charges against the former chief executive Kenneth D. Lewis and another executive. They have denied the allegations, and the case is pending.

The Citigroup case includes companion settlements with Mr. Crittenden and another executive. But the S.E.C. said in its complaint that other executives also had been aware of the legerdemain, prompting Judge Huvelle to demand an explanation as to why other Citigroup executives were not singled out.

And the Justice Department did not seek to hold any employees responsible for the crimes that it attributed to Barclays, leading Judge Sullivan to observe that corporations are inanimate objects.

“You agree there must have been some human being who violated U.S. laws?” he asked the government’s lead attorney.

He proceeded to ask that same question in a dozen different ways, growing increasingly exasperated with the answers, until he finally interrupted the government attorney to ask, “Can I just share a thought with you?”

“You know what?” he asked. “If other banks saw that the government was being rough and tough with banks and requiring banking officials to stand before federal judges and enter pleas of guilty, that might be a powerful deterrent to this type of conduct.”

Stop this judicial activism!

Just kidding -- thanks for posting, Nono. It's dismaying that this story isn't getting more coverage.

http://www.spurstalk.com/forums/show...17&postcount=9
http://www.spurstalk.com/forums/show...ghlight=rakoff

ElNono updated the story. :tu

Quote:

---

Yet the judge made it clear during an hourlong hearing in a crowded courtroom that he had serious concerns about how the commission reached such settlements — and whether they were tough enough.


“Doesn’t the S.E.C. have an interest in what the truth is?” Judge Rakoff asked, in reference to the commission’s longstanding practice of not forcing a defendant to admit any wrongdoing when settling a case.


Matthew T. Martens, a senior lawyer at the S.E.C., said that the government believed that the public knew the truth about Citigroup’s conduct because the government’s lawsuit laid out its claims against the bank.


“Last time I checked, correct me if I’m wrong, anyone can make an allegation,” said Judge Rakoff. “The mere fact that you say it’s so does not make it so unless it’s proved.”

---

http://dealbook.nytimes.com/2011/11/...s-enforcement/

Quote:

---

A federal judge who has sharply criticized the Securities and Exchange Commission's approach to settling securities cases has rejected a $285 million settlement with Citigroup Inc. over a mortgage-bond deal.


http://sg.wsj.net/public/resources/i...0806180112.gif Judge Jed S. Rakoff





In an order Monday, U.S. District Judge Jed S. Rakoff said the regulator, by not forcing the bank to admit to wrongdoing, failed to provide him with "a framework for determining" if the agreement is appropriate.



"The SEC'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," the judge said.

---

http://online.wsj.com/article/SB1000...448635560.html

Quote:

---

"This is erroneous," Judge Rakoff said in his 15-page opinion and order. "A large part of what the S.E.C. requests, in this and most other consent judgments, is injunctive relief, both broadly, in the request for an injunction forbidding future violations, and more narrowly, in the request that the court enforce future prophylactic measures."

"The Supreme Court has repeatedly made clear, however, that a court cannot grant the extraordinary remedy of injunctive relief without considering the public interest," he said, citing eBay, inc. v. MercExchange, 547 U.S. 388 (2006).

---

http://www.newyorklawjournal.com/Pub...nt_&slreturn=1

Activist Judge Alert!

these threads are mostly avoided like the plague by the usual suspects

you can make hay into horse pucky, but not the other way around. defending the banks against the public interest is a sure loser and so is arguing the banks are the public interest, which is the verdammte reality we're still living in

Just for conversation's sake....

What is the public interest here? Seems pretty obvious that Citi has done something wrong since you don't just give away $285 million for nothing. Seems equally obvious that Citi doesn't have much incentive to agree to any settlement that requires them to admit wrongdoing since that admission would probably (definitely?) be used against them in another lawsuit. Is it in the public interest to get a settlement and move on? Or is it in the public interest to force the public to fund a trial that given the size of the settlement Citi is going to be willing to spend tens, if not hundreds, of millions of dollars on defending and appealing if necessary?

Quote:

---

Originally Posted by coyotes_geek

Just for conversation's sake....

What is the public interest here? Seems pretty obvious that Citi has done something wrong since you don't just give away $285 million for nothing. Seems equally obvious that Citi doesn't have much incentive to agree to any settlement that requires them to admit wrongdoing since that admission would probably (definitely?) be used against them in another lawsuit. Is it in the public interest to get a settlement and move on? Or is it in the public interest to force the public to fund a trial that given the size of the settlement Citi is going to be willing to spend tens, if not hundreds, of millions of dollars on defending and appealing if necessary?

---

A settlement codifies nothing and really settles nothing germane to the charges. It seems to me that settlements offer little ongoing protection from same.

Allow Citi to settle for pennies on the dollar to conceal fraud and a host of other probable crimes, because it would be too costly to prove it, and we wouldn't want to take the risk of not prevailing in court.

Have I got that about right?

Quote:

---

Originally Posted by coyotes_geek

Just for conversation's sake....

What is the public interest here? Seems pretty obvious that Citi has done something wrong since you don't just give away $285 million for nothing. Seems equally obvious that Citi doesn't have much incentive to agree to any settlement that requires them to admit wrongdoing since that admission would probably (definitely?) be used against them in another lawsuit. Is it in the public interest to get a settlement and move on? Or is it in the public interest to force the public to fund a trial that given the size of the settlement Citi is going to be willing to spend tens, if not hundreds, of millions of dollars on defending and appealing if necessary?

---

The public interest would be that these settlements be punitive enough as to deter banks from continuing to pursue criminal activity. The judge simply feels that the remedies sought by the regulator are inadequate to deter such activity, as seen in the repeated settlement agreements with same and other banks over time. Especially when the alleged fraud encompasses billions of dollars.

The social cost of allowing fraudulent schemes to pass unpunished is fairly straightforward, I would think. Repetition, loss of confidence and trust.

...unpunished (and indeed, unprosecuted, as very nearly happened)

citi is comparably afraid of discovery as the prosecution should be of the cost of litigation

Federal judges are still beholden to their appointees up until the SCOTUS and as such many are clearly partisan as a result. Because of this the federal judiciary is often seen as corrupt and to a degree they are. OTOH, you compare that to Texas where the SCOT members are allowed to have direct contributions from litigants and all of a sudden federal courts are amazingly objective in comparison.

The more I think about it the more i think that a plural executive branch is in order.

Quote:

---

Originally Posted by coyotes_geek

Just for conversation's sake....

What is the public interest here? Seems pretty obvious that Citi has done something wrong since you don't just give away $285 million for nothing. Seems equally obvious that Citi doesn't have much incentive to agree to any settlement that requires them to admit wrongdoing since that admission would probably (definitely?) be used against them in another lawsuit. Is it in the public interest to get a settlement and move on? Or is it in the public interest to force the public to fund a trial that given the size of the settlement Citi is going to be willing to spend tens, if not hundreds, of millions of dollars on defending and appealing if necessary?

---

I really hope that you do not believe in capital punishment after making this post.

Quote:

---

Originally Posted by TeyshaBlue

A settlement codifies nothing and really settles nothing germane to the charges. It seems to me that settlements offer little ongoing protection from same.

---

True, but what should the SEC do if they're not 100% certain they've got a case that meets the burden of proof? There can be a pretty big gap between knowing Citi is guilty and proving that they're guilty.

Quote:

---

Originally Posted by Winehole23

Allow Citi to settle for pennies on the dollar to conceal fraud and a host of other probable crimes, because it would be too costly to prove it, and we wouldn't want to take the risk of not prevailing in court.

Have I got that about right?

---

Pretty much. Seemed like a good "moral hazard" issue to use to try and stir up a conversation here.

Quote:

---

Originally Posted by ElNono

The public interest would be that these settlements be punitive enough as to deter banks from continuing to pursue criminal activity. The judge simply feels that the remedies sought by the regulator are inadequate to deter such activity, as seen in the repeated settlement agreements with same and other banks over time. Especially when the alleged fraud encompasses billions of dollars.

---

Agreed, but the judge has taken a stance that seemingly would preclude any settlement whatsoever. One thing to think the settlement isn't big enough, another to take the possibility of a settlement completely out of the equation.

Quote:

---

Originally Posted by FuzzyLumpkins

I really hope that you do not believe in capital punishment after making this post.

---

???

Sorry, I'm not getting your point.

the problem with jury trial is that it will extremely long and complicated, and subject to best lawyering whores the banks can buy.

I suppose the defense will be "we naive innocent, good-faith bankers didn't know" that the mortgages bundled into a (bribed ratings agnecy rated) AAA investment were toxic and bound to fail. Would a jury buy that defense?

If lost it would be appealed up to SCOTUS, where we know the extreme activist right-wingers would approve "market efficiency" and "wealth creation" for Corporate-Americans as more important than (social) justice, truth, fairness, and protection of Human-Americans.

But I think a jury trial, CPSAN it!, would expose the profound corruption of the entire financial sector, esp of the big players.

Mortgage Servicers: Getting Away with the Perfect Crime?

In 2004, the FBI warned Congress of an “epidemic of mortgage fraud,” of unscrupulous operators taking advantage of a booming real estate market. Less than two years later, an accounting scandal at Fannie Mae tipped us off that something was very wrong at the highest levels of corporate America.

Of course, we all know what happened next. Crime invaded the center of our banking system. Wall Street CEOs were signing on to SEC documents knowing they contained material misstatements. The New York Fed, riddled with conflicts of interest, shoveled money to large banks and tried to hide it under the veil of central bank independence. Even Tim Geithner noted that Lehman had “air in the marks” in its valuations of asset-backed securities, as the bankruptcy examiner’s report showed that accounting manipulation to disguise the condition of the balance sheet was a routine management tool at the bank. There’s a reason Charles Ferguson got an Academy Award for his work on the documentary Inside Job.

And yet, no handcuffs. The big news on prosecutions in the traditionally high-powered Southern District of New York are convictions for relatively petty insider trading that are unrelated to the collapse of the economy. The criminal charges could have been filed in the 1980s. U.S. Attorney Preet Bharara has brought minor civil suits against banks, but nothing significant, and no criminal indictments for the Ponzi scheme of the last four years.

And what happens when this kind of fraud goes unprosecuted? It continues, even today. The same banks that ran the corrupt home mortgage securitization chain are now committing rampant fraud in the foreclosure crisis. Here’s New Orleans Bankruptcy Judge Elizabeth Magner discussing problems at Lender Processing Services, the company that handles 80 percent of foreclosures on behalf of large banks (emphasis added):

In Jones v. Wells Fargo, this Court discovered that a highly automated software package owned by LPS and identified as MSP administered loans for servicers and note holders but was programed to apply payments contrary to the terms of the notes and mortgages.

http://www.newdeal20.org/2011/11/28/...t-crime-65555/

the comments below the article are very interesting.

and lots of mofo's here claim us dissenters are "jealous" of the (financial) 0.1% for "working hard", up by their bootstraps to earn their fortunes.

And the mortgage fraud is only one scam going in the financial sector.

Impoverishing nations and killing people by trading up the prices of oil, food, etc well above supply/demand.

...

Quote:

---

Originally Posted by coyotes_geek

Just for conversation's sake....

What is the public interest here? Seems pretty obvious that Citi has done something wrong since you don't just give away $285 million for nothing. Seems equally obvious that Citi doesn't have much incentive to agree to any settlement that requires them to admit wrongdoing since that admission would probably (definitely?) be used against them in another lawsuit. Is it in the public interest to get a settlement and move on? Or is it in the public interest to force the public to fund a trial that given the size of the settlement Citi is going to be willing to spend tens, if not hundreds, of millions of dollars on defending and appealing if necessary?

---

It's an extreme example, to be sure, but in a sense, it's like the State of California reaching a plea deal to allow Charles Manson to walk with a misdemeanor because proving his culpability for the Tate/LaBianca murders would be time consuming and costly without any assurance of a guilty finding.

Quote:

---

Originally Posted by FuzzyLumpkins

Federal judges are still beholden to their appointees up until the SCOTUS and as such many are clearly partisan as a result. Because of this the federal judiciary is often seen as corrupt and to a degree they are. OTOH, you compare that to Texas where the SCOT members are allowed to have direct contributions from litigants and all of a sudden federal courts are amazingly objective in comparison.

The more I think about it the more i think that a plural executive branch is in order.

---

I'm not sure that I'd agree that all federal judges (or even a large majority of them) act beholden to those who appointed them. Most of the judges who sit on federal trial courts and intermediate appellate courts have absolutely no possibility of even being considered for the Supreme Court, so they don't generally act as though their time on the bench is an audition for the high court. There are certainly ideologues -- though they sometimes defy the stereotypes (Judge Silberman's decision for the DC Circuit on the ACA being a recent example) -- but that's true in many walks of life.

I suppose, though, that the second point explains my willingness to defend the federal judiciary as at least a relatively non-partisan group. There are few things in this life that are as head-spinning as taking an appeal of a civil judgment through the Texas Thirteenth Court of Appeals, which sits in Corpus Christi and Edinburg, and then to the Supreme Court of Texas. One has only recently seen its first elected Republican judge; the other may never again see an elected Democrat. The jurisprudence of those bodies exemplifies that political reality in stark terms.

A big part of Crime and Punishment, whether intentional or subconscious, is providing deterrents in which the expected value of the illegal action is negative, when the punishment of being caught and payoff if not caught are considered.

Take for example a petty thief who steals $1,000 by breaking into a house. If he doesn't get caught, his payoff is obviously $1,000. Say there is only a 5% probability of getting caught: for the punishment to be an effective deterrent, we need the punishment to equal to or greater than the payoff considering the probability. So, the punishment would need to be $20,000 (or equivalent jail time when converted to monetary terms) to generate an expected value of $0. Otherwise, in the long run crime will pay off.

For the same reason, this is why capital punishment hasn't proven to be an effective deterrent. For people committing capital murder, the death penalty isn't a punishment that is marginally worse than life in prison (and in fact, may be preferable).

In this case, we have the government providing a punishment that even without probability considered, is actually less than the payoff. If the punishment for stealing $700 million is only $250 million, then even with a probability of being caught of 100%, you would still steal the $700 million.

The governmental interest here is preventing this kind of behavior from continuing, yet the government doesn't seem to "get" that they are doing nothing to make it happen. Especially with white collar crime, stiffer penalties that create negative expected values are show to work (less so in blue collar crimes since they are often "crimes of passion" or committed by people with "nothing to lose").

and there's no 3rd strike law, so serial offenders just keep "settling" and pocketing most of the proceeds. and of course the industry doesn't care if one of their members is fraudster screwing Human-Americans, that's their main game.

of course you don't care...the system is set up for the benefit of Corporate Americans like you!

Gfy

^^^the typical attitude of Corporate Americans toward everyone else