Why Does Hero Judge Rakoff Get To Tell the SEC How to Do Its Job?

Judge Jed Rakoff seems to think the SEC should be able to do more with its resources. But is that his call to make?


Late yesterday afternoon, The Huffington Post's Howard Fineman published a lengthy interview with U.S. District Judge Rakoff, who is a folk hero among the Occupy Wall Street crowd and beyond. Rakoff made headlines for refusing to approve a $285 million SEC settlement with Citigroup over allegations that the bank misled investors into buying a giant mortage-related security that was rigged to fail. Handily enough, Fineman's piece went up the same day Rakoff got into a scuffle with the SEC over a potential appeal.

The interview covers a lot of ground, but I would like to focus on a very small, but important, snippet of it. It appears Rakoff doesn't think all that much of the SEC.

There are two ways you can look at the judge's battle between with the government and the banks. Rakoff rejected the SEC's deal with Citi because it didn't force the bank to either "admit or deny" any of the claims against it. That's been standard practice in SEC settlements for 40 years. But Rakoff decided to draw a line in a sand, arguing that it was not in the public's interest for him to rubber stamp an agreement that didn't contain any confirmed facts. From Rakoff's perspective, this is about the proper role of the courts. The judiciary, he believes, shouldn't lend its power to a settlement unless a judge can say for sure that it's fair to taxpayers. Without actual facts, that can't happen.

The SEC sees it differently. In its view, this is an issue about allocation of resources. If banks had to admit fault in settlements, it would open them up to a cascade of private lawsuits. So instead they'll choose to litigate cases until the bitter end. The SEC says it simply doesn't have the resources to bring a trial every time it sues a company.

In his interview, Fineman poses the resources issue to Rakoff, and while his response is short, I think it's also instructive:

Do you have to take into account the ability of the SEC to handle its workload? They plead that they are overburdened.

I don't think that that's an argument I've taken up. I think there are points to be made both ways. The U.S. attorney's office from the Southern District of New York, which has brought some of the great fraud cases of the last 50 years, has never exceeded 14 human beings in the fraud unit. That's the unit I was in. The SEC has hundreds, if not thousands, of people. On the other hand, they have to cover a very broad territory.

The U.S. Attorneys Office for the Southern District of New York is home to Manhattan's federal prosecutors. Before Eliot Spitzer came to town, it was the sheriff of Wall Street. Today, it's stil known as a repository for some of the most elite lawyers on the federal payroll. Think Delta Force, but far nerdier.

In some ways, comparing the SEC to the Southern District makes sense. After all, they patrol a similar beat. It's also deeply unflattering. Aside from the weak caveat about the SEC having more responsibilities, the judge basically says that if 14 lawyers can pin down Wall Street fraudsters, the SEC should be able to as well. It's a judicious dig at the commission's basic competence.

And it's not entirely fair. The SEC is far -- very, very far -- from perfect at its job. But the Southern District has the benefit of being incredibly selective with the cases it brings. The SEC is responsible for keeping our securities markets in working order. The Southern District can threaten an indictment, which gives its lawyers a lot of leverage when they sit down for settlement negotiation. The SEC can only bring civil cases, or refer matters to the Justice Department for a possible criminal inquiry. To a degree, you're talking about apples and oranges.

But there's a broader point. If Rakoff's decision holds, his ruling will change the way the SEC has to spend its very limited resources. He knows that, even if he hasn't literally "taken up" the argument in court. And he may be doing it based on a vague hunch that, well, they just should be able to do more. It amounts to: "Hey, I did it, why can't you?" Some might not agree. But I'm not sure it's the best way for the country to decide how to run its securities watchdog.