News this week that Citigroup's $285 million settlement with the Securities and Exchange Commission (SEC) was being challenged by U.S. District Court Judge Jed Rakoff had many cheering, including The Financial Times' John Gapper.
Judge Rakoff is "the latest hero" fighting for justice against Wall Street, Gapper writes, commending the "most influential and disruptive" figure for pushing back against what he says is a common ritual: major firms agreeing to paltry sums to avoid lengthy and costly court hearings.
In the accompanying clip, Gapper tells Yahoo!'s Dan Gross the SEC settles 90% of its cases because the federal agency doesn't "like to take risk" and has limited resources -- both monetary and staff -- to fight Wall Street behemoths.
"It's become very efficient for the SEC [to settle cases]," Gapper says. "Sometimes the SEC loses in court. People will say the SEC can't enforce properly, they're not competent. It's easier for the institution to settle."
In Citi's case, the SEC charged that the bank had defrauded investors in a $1 billion collateralized debt obligation connected to bad mortgages. If Judge Rakoff had agreed to the proposed settlement, Citi would neither admit to any wrongdoing nor deny the allegations. To avoid a July court hearing, Citi and the SEC can head back to the negotiating table to find a settlement suitable to Judge Rakoff and the public.
Gapper thinks the two parties will ultimately come to a new deal, an ideal situation not just for the SEC but Citi too.
"Even if the firms believe they did right and they don't believe they're guilty, going to court is risky because if they lose, and it's firmly established that they are guilty of securities fraud, that's a serious matter," Gapper says. "There's civil liability and loss of business."
The SEC brokered a record settlement against Goldman Sachs in 2010 for what the agency deemed improper and misleading marketing of Goldman's mortgage-backed securities products. In a case very similar to Citi's, Goldman was forced to write a check for $550 million - the largest sum ever paid by a Wall Street firm to the SEC. That may seem like a lot, but it's loose change for deep-pocketed firms like Goldman and Citi.
Gapper says Judge Rakoff noted in his Citi/SEC decision that the deal was "very good" for Citi and the charge was a "modest cost of doing business."
"Settling has become a ritual," he says. "It's very efficient for the SEC."
Will Citi and the SEC duke it out in court? Tell us what you think!
For more on this story, see: Crony Capitalism Report: Ritholtz Slams Paulson, Lauds Judge for Denying SEC-Citi Deal