Southern District Judge Jed Rakoff
Judge Rakoff (NYLJ/Rick Kopstein)

Southern District Judge Jed Rakoff (See Profile) followed his marching orders and reluctantly approved a $285 million settlement in a dispute between the Securities and Exchange Commission and Citigroup.

But Rakoff left no doubt about what he viewed as a hands-off process dictated by the U.S. Court of Appeals for the Second Circuit.

“They who must be obeyed have spoken, and this court’s duty is to faithfully fulfill their mandate,” Rakoff wrote in SEC v. Citigroup, 11-cv-7387, a civil fraud case involving allegations that the bank duped investors into buying into a shaky mortgage deal. “[The Second Circuit] has now fixed the menu, leaving this court with nothing but sour grapes.”

Rakoff in 2011 refused to sign off on the settlement, which he said allowed Citigroup to escape with a payment that amounted to “pocket change” and no admission that it had done anything wrong (NYLJ, Nov. 29, 2011). In that decision, Rakoff said Citibank had created a billion-dollar fund “that allowed it to dump some dubious assets on misinformed investors.” He refused to approve the settlement without “cold, hard, solid facts,” cited an “overriding public interest in knowing the truth” and described the consent decree as “neither fair, nor reasonable, nor adequate, nor in the public interest.”

But in June, the circuit remanded, finding that Rakoff had gone too far and infringed on the SEC’s discretion to settle cases (NYLJ, June 5).

On Tuesday, Rakoff issued a three-page opinion complaining that the circuit undercut the authority of judges to ensure that such agreements are appropriate. “[T]his court fears that, as a result of the Court of Appeals’ decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever,” Rakoff wrote.

In a footnote, Rakoff added: “Indeed, the Court of Appeals invites the SEC to avoid even the extremely modest review it leaves to the district court by proceeding on a solely administrative basis. One might wonder: from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”

Deputy General Counsel Michael Conley of the SEC represented the commission. Brad Karp, a partner with Paul, Weiss, Rifkind, Wharton & Garrison appeared for Citigroup.