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Looking for Justice in the Financial Crisis

Columnist: Scott Gerien
February, 2012 Issue

Scott Gerien
All articles by columnist
The Honorable Jed S. Rakoff is a federal judge sitting in the U.S. District Court for the Southern District of New York, located in New York City. About three years ago, Judge Rakoff was assigned to a trademark infringement case filed against a small, family-owned winery in Napa Valley by the largest producer of wine in Italy. I represented the Napa Valley winery. We believed the claim completely lacked merit and were prepared to defend it.

We knew Judge Rakoff to be a fair judge, but we didn’t want to defend the case in New York, since our client didn’t sell any wine there and there were no other contacts with New York to warrant jurisdiction. Judge Rakoff agreed. We filed a motion to transfer the case to California, Judge Rakoff granted it and issued a very well-reasoned opinion that showed obvious thought—which was unusual, as many judges normally don’t put such effort into opinions granting requests to transfer a case.

This past November, Judge Rakoff issued an opinion in a different case that showed the same level of deliberate thought and cogent reasoning as in my case, but this opinion is of much greater importance to the American public. In this case, brought by the SEC, it’s been alleged that, at the beginning of America’s financial crisis in 2007, Citigroup realized the market for mortgage-backed securities was beginning to weaken and, in reaction, created a $1 billion fund that let it dump dubious assets on misinformed investors. The most egregious part of these allegations is that Citigroup didn’t only knowingly create this fund of toxic assets, but it simultaneously took a short position on such assets so when they decreased in value, Citigroup realized a $160 million profit—while the duped investors lost more than $700 million.

So did Judge Rakoff find Citigroup liable on the claims leveled by the SEC? No. He rejected a consent judgment proposed by both the SEC and Citigroup, whereby Citigroup agreed to pay $285 million to the SEC and be enjoined from committing similar acts in the future, but all without any admission of liability by Citigroup. So, $285 million isn’t chump change, why reject the deal? Judges routinely issue such consent judgments where the parties are in agreement. In Judge Rakoff’s view, that was exactly the problem: He was being asked to function as a rubber stamp, one branch of government signing off on the decision of another branch of government without any consideration of the public interest.

Any federal judge who’s asked to enter a consent judgment by a federal agency is required to ensure such judgment is “fair, reasonable, adequate and in the public interest.” The SEC didn’t provide Judge Rakoff with any proven facts to support the requested judgment and Citigroup refused to admit to any wrongdoing or any of the facts alleged in the complaint. Judge Rakoff noted that “because this case 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.” The judge then concluded, “the SEC, 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.” He then set trial for July 16, 2012.

What seems remarkable to me is that, as we look to a presidential election in 2012, there are politicians who make out the judiciary to be the problem with America, suggesting that Congress be allowed to limit those issues that can be considered by the courts or that funding to the courts be cut to prevent them from functioning. Yet, five years ago, we saw the worst financial meltdown in U.S. and world history since the Great Depression and, I can say with unequivocal certainty, the judiciary wasn’t responsible for it. Five years later, we have an executive branch and legislative branch of government that seem to show no interest in holding any financial institutions accountable for their unethical greed and illegal actions in causing this crisis, perhaps because both of these branches can be viewed as accomplices in allowing such crisis to occur.

That leaves the American public with the unelected federal judiciary, a branch of government not beholden to any lobbyist, but appointed to uphold the law based on legal qualifications. I don’t mean to suggest that judges don’t hold political views and that those views don’t influence their reading of the law, because they do. However, I truly believe any American, especially in this day and age of partisan bickering, can expect more justice from the courts than can be expected from any elected politician.

In the Citigroup case, Judge Rakoff refused to let the judiciary become a political tool to further the cozy relationship between the regulators and the banks. Even if the SEC can’t prove its case against Citigroup, Americans will have justice in that, with a trial, there will be transparency of information in what happened, and we’ll learn whether a major institution was able to defraud the public due to its own deceit or because the government let it do so.

As we enter this political season and you hear the posturing about the evils of the U.S. judiciary, remember Judge Rakoff, and other jurists like him, who are holding the government and financial institutions responsible for telling us what really happened, and ask yourself: Which branch of government is really the problem?


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