man with head in hands

Occupy Wall Street filed an amicus curiae brief on May 21 urging the 2nd U.S. Court of Appeals to affirm the district court’s rejection of a $285 million settlement agreement Citigroup reached last year with the Securities and Exchange Commission (SEC) to resolve charges that the giant bank had gamed the mortgage bond market.

The brief, submitted by the Alternative Banking Group of the New York-based movement, supports Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York, who in November refused to approve the settlement because he said he lacked a sufficient evidentiary basis to assess whether the settlement was fair, reasonable, adequate, and in the public interest.

Rakoff was also troubled by the fact that the settlement allowed the case to be resolved without Citigroup either admitting or denying the charges, his Nov. 28 opinion said. Permitting a defendant to settle a case without making any admission is a common practice of the SEC.

In The Complaint Filed

In a complaint filed in October, the SEC alleged that Citigroup led investors to believe that the investments in a $1 billion mortgage-bond deal were independently selected, when in fact they were assets with negative projections chosen by Citigroup.

Citigroup allegedly took short positions in these assets that netted the bank $160 million in profits, while investors lost $700 million, according to Rakoff’s opinion.

Simultaneous with its filing of the complaint, the SEC and Citigroup filed their consent judgment to settle the matter.

Instead of approving the settlement, Rakoff told the parties to prepare for trial on July 16. Both the SEC and Citigroup filed interlocutory appeals. They also sought a stay of the case pending appeal, which was granted by the 2nd Circuit in March. In granting the stay, the 2nd Circuit found that the SEC and Citigroup had a good chance of succeeding on the merits of the appeal.

Occupy Wall Street

Given that the SEC and Citigroup are on the same side of the appeal, Occupy Wall Street (OWS) seeks to play the role of appellee. Better Markets Inc., a non-profit group that promotes the public interest in the financial markets, also filed an amicus brief defending Rakoff’s decision to reject the settlement. Better Market’s brief, filed in February, mostly concerned the need for there to be a party to fulfill the role of appellee in the case, and left other arguments for a subsequent brief.

The OWS brief made substantive arguments, however. The brief contended that Rakoff was within his right as the fact-finding judge to pronounce the evidentiary basis insufficient to approve the settlement, and that the trial should proceed.

According to the OWS brief, Citigroup and the SEC mischaracterized the case in their appeals, claiming that central issue was whether the Rakoff was correct “in demanding an absolute admission of liability as a necessary condition to confirmation, in an attempt to destroy the hallowed practice of settlement-by-consent-decree.”

The case really involves whether a district court has the authority to require facts to be produced so it can “assess how a proposed consent order would affect the public interest,” the OWS brief said.

“We believe that the behavior highlighted in this case was not only destructive, but also was the tip of an iceberg of similarly destructive behavior. This … settlement forecloses any chance of shedding light on such behavior – and since this case was seen as particularly egregious, the SEC’s failure to reach solid conclusions about culpability here can be seen as emblematic of a general refusal to pursue the public’s interest in information and accountability,” the OWS brief said.

Because Rakoff was well within proper his function as the trial judge to make a determination as to facts, the appeals are unripe, the OWS brief asserted. In the alternative, OWS argued that the egregious behavior of Citigroup in this case weighs against confirmation of the settlement.

Rakoff Did Not Show Proper Deference

OWS and Better Markets are facing long odds. The 2nd Circuit has already suggested in its order granting the stay that Rakoff did not show the proper deference to the SEC’s decision to settle.

This requirement for deference is known as the “Chevron doctrine.” Taken from the 1984 U.S. Supreme Court case, Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., the doctrine says a reviewing court should not substitute its judgment for a federal agency, especially when it comes to discretionary and policy-based matters.

“Chevron deference may have applied had Judge Rakoff conclusively ruled on whether the … settlement was good policy. However, he did not reach such a conclusion,” the OWS brief said. Instead, the Rakoff opinion said only that the settlement had not met the standards for an injunction and that the public interest is one of the factors to be assessed.

According to a report in the Huffington Post, the 2nd Circuit said Rakoff misinterpreted precedent when he include the public interest as a factor, and in doing so, exceeded his authority.

However, OWS cited precedent in its brief that held that the public interest should be considered. Namely, it cited the 2006 U.S. Supreme Court case eBay Inc. v. MercExchange LLC, which said that “judges must consider the fairness of a settlement to non-party stakeholders and the public interest”

Rakoff, the brief continued, found the evidence provided insufficient to assess this question properly.

The OWS Brief

The OWS brief also characterized the $285 million settlement as nothing more than a “wrist-slap” to a company like Citigroup, and that it would fail to deter similar conduct in the future. The brief detailed how gambits like the one described in the SEC’s complaint against Citigroup created false demand for collateralized debt obligations, and in turn inflated the market for subprime mortgage loans, generating a bubble so big that when it popped, it nearly laid waste to the world financial system.

“While the SEC has an interest in settling the case because of its heavy workload and limited resources, the public interest would be better served by full transparency and a punishment sufficient to deter such damaging conduct”, the OWS brief said.

The lack of admission required by the settlement also concerns OWS. Its brief said that the SEC apparently is of view that “requiring misbehaving entities to admit to wrongdoing is unduly harsh because that could facilitate private lawsuits. It is puzzling that the SEC is so exercised about the risk that private parties will become better informed about inappropriate behavior by regulated firms, or the risk that private parties might consequently find it easier to seek redress when they are injured by such firms.”

The OWS brief added that the SEC is “an imperfect proponent of the public interest, and its assertions that it represents that interest must be viewed skeptically.”

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