The odds that Citigroup's $285 million securities settlement with the Securities and Exchange Commission (SEC) would avoid the courtroom of Judge Jed Rakoff were 97%.
Citi's luck was not good.
Rakoff's nine pointed questions to Citi and the SEC about their deal — and his rejection of an SEC settlement with Bank of America Corp. over covert Merrill Lynch bonus payments — have spawned a string of news articles calling the jurist, 68, "feisty," a "populist" and "Judge Dread."
Fireworks appear inevitable at a fairness hearing scheduled for Wednesday in Rakoff's courtroom in U.S. District Court for the Southern District of New York. But the judge's career doesn't suggest inherent hostility toward the SEC or large banks. He's less a vigilante than he is uncomfortable with disposing of major securities cases with settlements that fail to resolve the legal issues at hand.
The SEC's complaint against Citi is a perfect example. News reports characterized the suit as alleging that Citi officials built CDOs designed to fail and enlisted a CDO manager to misrepresent them to buyers. That's not quite right.
Instead, the SEC merely alludes to a massive fraud while limiting itself to alleging that a low-level Citi employee "neglected" to put wording into disclosure documents that described Citi's role in the CDO deals.
Under the pending settlement the SEC doesn't even prove that. Rather, its deal requires Citi to accept punishment without admitting any guilt — precisely the sort of pact Rakoff blasted in the Bank of America case.
The dissonance between what the SEC implied and actually alleged leaves two possibilities: Either it deliberately chose not to bring a strong case or it never had one. In both the BofA case and the runup to the Citi hearing, Rakoff has balked at signing off on settlements that tried to leave that question unanswered.
"The SEC continues to want to declare a victory without winning even a near victory," said John Coffee, a professor at Columbia University's law school who co-teaches a securities law seminar with the judge and faults the commission for a "settlement culture."
This reporter audited a securities law seminar jointly taught by Coffee and Rakoff in 2009 and agreed not to report on the contents of the seminar but can safely venture that Rakoff's subsequent rejection of Bank of America's settlement came as no surprise to his students. Which brings us back to the SEC and Citi's lousy luck in drawing Rakoff.
"I expect the [Citi] settlement would have been tougher if both sides knew they were going to get Rakoff," Coffee said.
A key prelude to getting Rakoff's approval for the BofA pact was establishing a measure of culpability for BofA and forcing the SEC to reveal its weak spots, a humiliating experience for both sides.
Citi executives appear ready for similar treatment. Its attorney, Brad Karp of Paul Weiss,is the same lawyer brought in for BofA's second attempt. Karp brokered a harsher settlement with the SEC on Bank of America's behalf that ultimately met with Rakoff's grudging approval.