More On Legal & Compliancefrom The Advisor's Professional Library
- Recent Changes in the Regulatory Landscape 2011 marked a major shift in the regulatory environment, as the SEC adopted rules for implementing the Dodd-Frank Act. Many changes to Investment Advisers Act were authorized by Title IV of the Dodd-Frank Act.
- Nothing but the Best Execution Along with the many other fiduciary obligations owed by RIAs, firms owe a duty to seek best execution of clients transactions. If they fail to do, RIAs violate Section 206 of the Investment Advisers Act.
Judge Jed S. Rakoff on Monday rejected a settlement negotiated between the SEC and Citigroup over a $1 billion mortgage fund and said that he could not determine whether the $285 million settlement was “fair, reasonable, adequate and in the public interest,” as legally required, since the agency claimed but did not prove fraud on the part of Citigroup.
In his 15-page ruling, he also called Citigroup a repeat offender, and said that current SEC policy of not requiring an admission of wrongdoing creates a substantial potential for abuse.
The New York Times reported that Rakoff, a judge in U.S. District Court in Manhattan, in throwing out the settlement, was highly critical of the agency’s habit of allowing companies to settle without having to admit wrongdoing. He has already been critical of the SEC’s handling of the case and also imposed a record penalty in the Rajaratnam-Galleon case while again upbraiding the SEC for its treatment of insider trading cases, as previously reported by AdvisorOne.
Robert Khuzami (left), director of the SEC's Division of Enforcement, said in a statement after the ruling that while the SEC "respects the court’s ruling, we believe that the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial."
Khuzami went on to say that the court’s criticism that the "settlement does not require an ‘admission’ to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial. It also ignores decades of established practice throughout federal agencies and decisions of the federal courts."
The usual practice of the SEC has been to work out a settlement with the accused wrongdoers without them having to admit wrongdoing. The agency previously has done so numerous times, including in cases against Bank of America, JPMorgan Chase and UBS, among others. It says that since it lacks the money or staff to square off against big firms in court, it must do so. Big companies, it said, do not want to concede wrongdoing since it will open the door to liability and lawsuits. However, such cases must be approved by a federal judge.
Rakoff has been outspokenly critical of the practice, which he says is “hallowed by history, but not by reason.” He has also said that such a method creates substantial potential for abuse because “it asks the court to employ its power and assert its authority when it does not know the facts.” That, in turn, undermines the constitutional separation of powers, he said, because it asks the judiciary to rubber-stamp the executive branch’s interpretation of the law.
Brian Rubin, a partner in the law firm Sutherland Asbill & Brennan in Washington, told AdvisorOne that "over the long term, I think the SEC will revisit its use of 'neither admit nor deny' settlements." With regard to this case, "my guess is that the parties will renegotiate the settlement terms, which the court will ultimately accept."
Rakoff said that the SEC “has a duty, inherent in its statutory mission, to see that the truth emerges.” He added that it is hard to see the benefit to the SEC from this settlement “other than a quick headline.” Even $285 million, he continued, “is pocket change to any entity as large as Citigroup,” and looked at by Wall Street firms “as a cost of doing business.” He ordered the SEC to prepare to bring a trial on July 16.
The agency disagreed, as of course did Citigroup, with the former concerned that the decision could handicap the SEC’s enforcement efforts if it ends up blocking the agency from settling cases in which the defendant does not admit the charges.
Harvey Pitt (left), a former chairman of the agency who is now chief executive at Kalorama Partners in Washington, was quoted in the report saying of the ruling, “This is clearly a case of great significance. It’s also a case for which there is no direct precedent. Courts have been approving settlements by government agencies without any admissions of wrongdoing for years.” There is no suggestion, he continued, that this decision would apply in every case, because Citigroup has reached such settlements before.
Rakoff wrote in his ruling, “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. In any case like this that 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.”