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Yet he reserved his harshest rebuke for the SEC:
An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts–cold, hard, solid facts, established either by admissions or by trials–it serves no lawful or moral purpose and is simply an engine of oppression.
Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. 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. But the S.E.C., 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.
Contrivances may be an understatement. Calling Citigroup as a “recidivist” because it had settled previous cases with the SEC in exactly the same manner, Rakoff contended that the financial institution is more than willing to agree to such terms because the SEC hasn’t monitored settlement compliance or brought contempt charges against repeat offenders in at least 10 years. Citigroup is certainly aware of that fact. It agreed not to violate the same anti-fraud statute involved here “ever again” on four other occasions, in April 2000, March 2005, May 2006, and July 2010.
And Citigroup is hardly alone. Nineteen Wall Street companies have been repeat offenders over the past 15 years: American International Group, Ameriprise, Bank of America, Bear Stearns, Columbia Management, Deutsche Asset Management, Credit Suisse, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, Putnam Investments, Raymond James, RBC Dain Rauscher, UBS and Wells Fargo/Wachovia.
Why hasn’t the SEC cracked down harder? The excuse is tiresomely familiar. Better to take the sure fine than risk losing in court to firms with legions of high-priced lawyers willing to defend them. Perhaps so. But maybe winning in court is more difficult due to the reality that at least 219 “major officials” have left the agency–only to return as a representative of a client with business before it. Senate Finance Committee member Sen. Charles Grassley (R-IA) illuminates the obvious. “The SEC’s revolving door seems more active than ever,” he noted, adding that such a system leaves the SEC unable to effectively regulate Wall Street. Roberta Karmel, a former SEC commissioner, was equally blunt. “Who do you want representing these clients before agencies such as the SEC with very, very complex rules?” she asked. “Lawyers who know nothing about the rules–or lawyers who do?”
In fairness, former SEC employees are barred for life from working on any matters they were working on while employed by the Commission. Furthermore, the SEC can only file civil litigation. The Justice Department must file any and all criminal charges against brokerage firms.
So where is the DOJ? Nowhere. “We have brought hundreds of criminal cases for mortgage fraud, investment fraud and other white-collar crimes. When we find evidence to prove beyond a reasonable doubt that a crime was committed, we will not hesitate to pursue criminal charges,” said a DOJ spokesman.
So how many criminal charges have been brought by the FBI against business executives? Zero. Ostensibly the burden of proof is too high. “There’s been a realization and a more deliberate targeting by the Department of Justice before we launch criminally on some of these cases,” said David Cardona, former deputy assistant director at the Federal Bureau of Investigation. The Justice Department has decided it is “better left to regulators” to take civil-enforcement action on those cases, he added.
That would be regulators who are willing to administer a financial wrist slap without an admission of guilt and tolerate multiple violations of the same statutes without pursuing contempt violations–for at least a decade. Ten days ago, Judge Rakoff made it clear that the SEC’s self-inflicted impotence will no longer be tolerated.
As for the DOJ, $1.2 billion of missing customer funds and a Sarbanes-Oxley Act that holds CEOs criminally accountable for company malfeasance would appear to make Jon Corzine the proverbial poster boy for prosecution, no matter how high the burden of proof. When the integrity of the entire financial system is at stake, DOJ’s reticence to prosecute is no longer acceptable.
Judge Jed S. Rakoff has essentially blazed a trail. It behooves the SEC, the DOJ and other judges to follow his lead.
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