Frustration at the banking sector and the government’s approach to regulation and enforcement is not relegated to the world of progressive blogs and Tea Party rallies. It would appear that the judiciary has caught a case of it too.
Late last week Washington D.C. federal district court judge Ellen Segal Huvelle, refused to approve the landmark and controversial settlement between the Securities and Exchange Commission and Citigroup that had Citi paying $75 Million in connection with fraudulent practices pertaining to subprime lending and disclosures. The SEC had accused Citigroup of repeatedly making misleading statements concerning the extent of its subprime holdings both in calls with analysts and in regulatory filings.
In exchange for payment of the $75 million the bank neither admitted nor denied the SEC’s allegations and made a promise to refrain from future violations of securities laws. Hardly a concession with any teeth for a company that received $45 billion in government rescue funds.
According to The Wall Street Journal, and The Washington Post the judge said she was “baffled” by the agreement between the parties and could not, under the given circumstances, agree that the settlement was “fair and reasonable”. Among concerns cited include questions concerning the depth of the SEC investigation and just how it determined the $75 million penalty. The judge also questioned the SEC’s decision to name just two individuals in the suit when the allegations concerned widespread miscommunications and efforts to shield the banks subprime exposure from shareholders.
The heart of the judge’s concern was why shareholders should ultimately bear the price of the SEC sanction rather than all of the senior executives who were involved in the misstatements– concerns that had been expressed earlier when the settlement between the SEC and Bank of America was rejected as reflecting a “cynical” relationship whereby the agency could argue it was penalizing the industry but levy sanctions that were, by all intents and purposes, meaningless in comparison to the conduct at issue.
Just because the deal has been rejected right now does not mean it is dead. The judge asked the parties to submit additional briefing on her concerns which is due to the court mid-September. In the meantime though it is nice to see the separation of powers in action. We know that Wall Street will not effectively police itself. And so far the regulatory agencies (with a few minor exceptions) have shown themselves too weak-willed or comfortable with the private sector to do any meaningful enforcement. That means it is up to the judiciary to force both the SEC and Wall Street to abide by the law. So far it’s been the work of a few strong district court judges to really try and right the wrongs done from the past decade-and-a-half of deregulatory free-for-all that was the 1990′s. I’m glad someone’s doing their job.
photo courtesy of Mike Licht, NotionsCapital.com via Flickr