Maverick Judge Jed Rakoff Stares Down The Street

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One of the biggest problems with Wall Street's malfeasance is how the ruling elite view legal settlements – as little more than an acceptable cost of doing business.

Well, no more.

Thanks to Judge Jed Rakoff we may see some real regulatory action leading to good old-fashioned investigations, perp walks, and even jail for the guilty.

I'm not talking just about the Bernie Madoffs or the Raj Rajaratnams either. I'm talking about potentially CEOs and even entire corporate boards.

Judge Rakoff recently rendered a 15-page decision rejecting the U.S. Securities and Exchange Commission's (SEC) $285 million settlement with Citigroup Inc. (NYSE: C) over toxic mortgages, calling it "neither reasonable, nor fair, nor adequate, nor in the public interest."

This is important because settlements like these have been a farce for years – little more than the financial equivalent of a parking ticket and having about as much impact.

In fact, in a world where banking secrecy is paramount and investment firms like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and others rule the roost, they're little more than obfuscations of the truth.

The investigations into these banks are toothless or highly secretive at best. Rarely does the public see anything even remotely resembling full disclosure.

Instead we're supposed to be placated by headlines insinuating that the SEC, the National Futures Association (NFA) and more than 20 other regulatory agencies are looking out for our best interests.

Who are they kidding?

A Drop in the Bucket

Remember the $550 million fine Goldman was forced to pay for its role in toxic credit default swaps (CDOs)? At the time it was the largest ever levied.

SEC officials couldn't stumble over themselves fast enough nor get enough sound bites. I recall lots of PR shots with earnest-looking people evidently proud of themselves for having made Goldman pony up at the time.

And the mainstream press loved it. But there was one tiny problem.

The firm booked $13.3 billion that year. Paying off the SEC in a settlement that neither admitted nor denied wrongdoing was an acceptable cost of doing business that amounted to a mere 4% of revenue.

The proposed Citi settlement was much the same. It would have required Citi to give up $160 million of alleged ill-gotten profits, $30 million of interest, and a $95 million kicker for negligence.

Bear in mind, Citi reported full-year net income of $10.6 billion on revenue of $60.5 billion in 2010 which means that, like the Goldman fine, the settlement is a drop in the bucket at a mere 1.50% of net income.

I think Judge Rakoff's ruling has been a long time coming. And I love the fact that he specifically called out the Citi settlement as too lenient – especially when it also potentially allows Citi to skate on reimbursing investors for the $700 million the firm lost as part of its toxic mortgage trading.

You may not realize this, but private investors cannot bring securities claims based on negligence. In my mind, they should be able to, but for now this is the way the law stands.

The way I see it, Rakoff's decision finally gets at the core of what caused the financial crisis: toothless regulators beholden to the very powerful elite they were supposed to keep in check.

I am all too glad to see him show the public the first glimpse of backbone we've seen yet.

Washington, are you watching and listening?

Sitting on the Bench, Swinging for the Fences

Judge Rakoff noted in his ruling that there is an "overriding public interest in knowing the truth."

Yes, there is.

And as Judge Rakoff put it, the SEC's core duty is to "see that the truth emerges." In the event that it doesn't as part of the settlement process, "courts must not, in the name of deference of convenience, grant judicial enforcement, to the agency's contrivances."

I did some checking and I learned that this is not the first time Rakoff has stuck it to the SEC.

Apparently, he's the one who made headlines when he initially rejected the BofA settlement related to that bank's shotgun takeover of Merrill Lynch & Co., a fact I'd forgotten.

At the time, Rakoff rejected the SEC's $33 million BofA settlement on the grounds that it punished shareholders. The SEC then came back with a much more realistic $150 million agreement.

Some think Rakoff has gone too far. They worry that judges have no business interfering in agreements ostensibly reached by private parties.

But I disagree. I believe the SEC is the public.

And the public has the right to know about any case where the transparency of the financial markets (or lack thereof) has so impacted the markets as to destroy the wealth of millions of hard working people and bring the global markets to the edge of oblivion.

Frankly, I'd love to shake Judge Rakoff's hand.

I hope what he's done encourages judges to finally stand up for the body of law they supposedly represent and the public that it's intended to protect.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. ronald goddard | December 5, 2011

    wow! what a breath of fresh air. Does that mean that the banksters have been abandoned by their masters? There comes a time and a moment when the world changes colour…..has red become white? Has 'red shield' suddenly become white knight. Nothing changes but everything. I wonder if william shakespeare was alive today would he write 'the merchants of washington' oops sorry London..or was it venice? in singular of course..venice..but london, plural.

  2. timothy hardacre | December 5, 2011

    Well done Judge-the regulatory agencies have been far too lax for the last 30 years and the point made above is entirely apposite.The regulatory agencies should be representing the interests of the public AND the investors because the public even if not qua investors have an interest in fair and transparent markets.
    These markets have been in some cases not merely muddy but downright fraudulent.

  3. Wayne | December 5, 2011

    This is a good start. Now someone needs to go after those in the capital building. Such as seen on 60 minutes. Of course they write the laws, so they make insider trading legal for themselves, but illegal for everyone else. How pathetic. Somehow the people or the court need to make this sleazy cheating by those who tell others what they must do, to be told what they must not do or they will have the same punishment as the others, by the laws they wrote. Personally, I think they should make the law retroactive.

  4. Brian Rapson | December 5, 2011

    Great article! Yes, the SEC is most definately the public and the public has every right by Law to have FULL DISCLOSURE. Judge Rakoff should receive a medal and I wouild also like to shake his hand and I'm not even a U.S. citizen. I'm a 32 year serving Police Officer with the Toronto Police Force in Canada. I have testified in thousands of cases in my career and I have met some great Judges and not so great Judges. The job of cops and Judges is to serve the public at large and ensure the right thing is done for everyone. Money is the route of all evil as we are seeing far too often. I strongly believe the day will arrive when these fraudsters will pay for what they have done and spend many years in jail where they belong. Merry Christmas everyone.

  5. Clair Sauder | December 5, 2011

    AMEN!! Keith. And Thank you Judge Rakoff!

  6. Mike | December 5, 2011

    Thanks for this Keith. I hope you and Shah will continue to admit that just making a buck without the proper oversight is no way to run Wall Street and that you'll likewise continue to call for fairer rules of regulation that'll be enforced with the appropriate punitives like Judge Rakoff is pushing. I'm all for making that dollar under a level playing field that all of us can play on, not just the the affluent and powerful few who tip all the rules in their favor and say to hell with the rest of us. Thanks again for your honesty and concern for all the little guys (dare I say it? . . . the other 99% of us out here).

  7. Werner | December 5, 2011

    Keith, many thanks for drawing your readers attention to these facts. Mainstream media are certainly not going to to talk aboout it too much, dependant as they are on Wall Street's favours.
    There is so much cheating going on in the financial markets, though the US will not have the exclusivity of it, but most likely rather look like champions in this exercise, easily copied by other markets.
    Besides the Dollar risk I am getting more and more reluctant to consider touching US markets, just as much as many other markets. I have given up too, looking for relevant information in main street media, your and your colleages analysis makes for quick and well documented information.
    Thanks again for your help.

  8. TOM | December 5, 2011

    This Judge will be on the Banksters hit list. Just like the women that blew the whistle on Robo-signing and was recently found dead by homocide. Also like the Federal judge that has rulled against Obamma three times. He was shot when gabby Giffords was shot. There is much speculation he was the real target. I admire this judges bravery he is putting his life at jeopardy. A true Patriot.

  9. felix mosso | December 5, 2011

    There is SO MUCH corruption in Gov, this article is a great win for citizens. I have always thought that
    these 'fines' are misplaced. The fines are against the company and paid out of STOCKHOLDERS FUNDS.
    The stockholders have no control and probably don't even know that the subject problem has occurred.
    To keep future indiscretions under control, I definitely think that the fines should be levied against the
    BOARD of Directors of these companies! This would take care of any shady deals and keep the board
    member's feet in the fire !

  10. Joe Ball | December 5, 2011

    I hereby nominate Judge Rakoff for the Nobel Prize in Economics!

  11. DrBillLemoine | December 5, 2011

    Well, done piece. This is what Occupy Wall St. is about. This is what we small investors compete against. This is what the oligarchs have spent fortunes for–smoke and mirrors, obfuscation, concealment, misdirection, a slap on the wrist–no real comeuppance. In New York and Maryland attorneys general are digging into fat cat shennanigans and all middle class investors, pensioners, bank clients are supportive. Keep the pressure on for breaking up the biggies, gaining more transparency, reducing computerized trading, and regulating the arcane, new systems of Wall Street to make money at public expense.

  12. topeka | December 5, 2011

    Now the Judge will be on the radar. He will back down or find himself looking over his shoulder for the rest of time.

    No, mere settlements will not deter these criminals. They violate their fiduciary duties, and buy access and privilege undreamt of by Madoff, and their crimes are backed up by the tax payers… so a few billion out of someone else's pocket will make a difference?

    The only meaningful changes will be two: Restate the law of fiduciary duty to restore criminal penalties for taking other peoples' money and putting it into derivative schemes; vacate the law of the Business Judgment Rule for public companies, and last apply criminal penalties comparable to the actions of chemical or food executives: If you sell a poison as a food or medicine, you get to bunk with Bubba for 25 years. The same should apply to derivative plays AND when you buy a politician to get Taxpayer Guarantees for your Kool-Aid derivatives… add a NON-lethal trip to the old sparky once a week until the business has paid off the lost funds.

    Also, don't let the Big Guys demand the Little Guys "Pay To Play" (by being forced to participate) and then the Little Guys take the blame when their packages collapse. Even conservatives blame small banks for making necessary CRA loans when the other alternative was ??? (Closing the doors.) Blame shifting is a common ploy of an elite suddenly caught with its hand in the cookie jar.

    … just experience of course…

  13. Ted | December 5, 2011

    Well done. Creating accountability and reinstating a level of integrity should be imparative if our society and economic system are to survive. Priviatizing profits and forcing the public and shareholders to subsidize losses due to incompetence and fraud must be delt with. Those with the courage and selfnesness to do so are uncommon in America today.

  14. Gary Schlosser | December 5, 2011

    Thanks Keith. You and Shah must be comparing notes. I appreciate the reasonable tone of your article and the thoughtfulness in which you wrote your comments. Yes, the SEC is the hand-maiden of the big banks and only we the middled class are beginning to learn how wall street (lower cas) really works. Too bad OWS didn't see fit to make these points or find someone who could make them. Thanks again for pointing out.

  15. Ima Nemisis | December 6, 2011

    Judge Rake-0ff, ya gotta love the alliterative similitude here. Hopefully this similarity will keep him focused so he doesn't live down to his moniker. All eyes will be glued on his actions and how far and how fast he can drive the money mobster-monkeys out of the Temple, and out of our wallets. The Judge may earn a place in Wall Street history, along with Shah (Gilani) and Keith (F-G) as the righteous trio exposing the corruption of the Fed, Wall Street 'Shbanks,' the SEC and the money mobster-monkeys who run them in collusion. I'd like Mayor Bloomberg to offer Shah, Keith and Judge Rake-0ff places in the NYC Witness Protection Program, or by some honest District judge in the Federal version of a WPP thereof, before the money mobster-monkeys put a contract out on them. Go get 'em Judge.

  16. Conrad Proctor,MD.MS,FACS | December 6, 2011

    Please comment on the fact that, according to financial advisors Doug Casey and Ed Steer,
    JP Morgan has been selling short in late and after market electronic trading, trading billions of dollars worth of silver and gold contracts. This action has driven down the prices of silver and gold substantially on an almost daily basis, forcing liqidation at very low prices by individual investors and hedge funds with margin accounts. This manipulation has enabled JP Morgan to buy back their contracts at an enormous profit.
    This controlling of the commodities markets is similar to the actions of Jesse Livermore in the 1920's which resulted in this type of manipulation of these markets being declared illegal.

  17. Chet Walsh | December 6, 2011

    The SEC, Banks and Investment firm dog and pony show has gone on far too long. Judge the 99% are with you. wouldn't it be nice if the higher courts back the judge up. Next step is to disallow the fines and penalties as a tax write off. I worked for one of the largest corporations in America for 26 years and watched time and again how they paid small fines for violating the law. This is the company that paid no taxes in 2010 on a 6 Billion income. They even received 2 Billion in tax refunds for their financial losses. What a system!!!!! How do we nominate this Judge for the next vacancy on the Supreme Court. Maybe Obama will do it after he gets the corporate donations to his re-election campaign out of the way.

  18. Jay Curtis, author of THE CODE | December 6, 2011

    As an attorney of more than 40 years, I am so supremely happy that this judge has scolded the SEC and asked for the truth and a factual finding in court of wrongdoing. Its time the SEC did its job and actually regulated. Republicans argue we need less regulation. Perhaps if the SEC was given the resources by Congress and given a mandate to actually enforce the law and regulations we have now, we could accommodate the Republicans, but they cut SEC funding and want to tie their hands plus see that the SEC has cozy former bankers and bank lawyers at the helm. Instead of a fine of 4% or 1% of revenues, the SEC should impose a fine of 120% of a firms profits if the SEC actually believes they have violated the securities laws. Only a true punishment where executives go without bonuses as well as salaries and the firms shareholders demand that heads roll as well as criminal prosecution of executives where clear criminal fraud was committed is the way to straighten out Wall Street. It is often said that capital punishment doesn't actually deter murderers from committing murder. But trust me, capital punishment (meaning taking 100% of the profits and/or revenues from a Wall Street firm for its securities law violations) will definitely deter these firms from their prior (and present) abuses of accounting rules and financial manipulations.

    If Wall Street doesn't want to make such supreme sacrifices as giving up a year's revenues or profits, then the SEC should go all the way through discovery and trial and criminal prosecution of just one really big Wall Street fish. It would take only one serious enforcement going all the way to change the entire tenor and nature of Wall Street's behavior. They made money 20 years ago without all this phony paper and they will go back to it immediately when its too costly to be so devilishly creative with derivatives, etc.

  19. Gordan Finch | December 6, 2011

    Judge Jed Rakoff, congratulations there are millions who will support you in many countries, please jail these gangsters. Start with the Zurich Insurance Empire that caused the crisis. Corruption and fraud by this company permeates every sector and government. Break it apart expose the subsidiaries and track down the $trillions (missing) lost, from earlier balance sheets.

    Lets see legislation to enforce these crooks to show all associate companies with subsidiaries in all documents. With legislation to limit the number to ten in one parent group company.

  20. kay | December 8, 2011

    Obama should be ashamed for being asleep at the wheel (at best).

    The Wall Street crooks should have to pay back ever dime they stole – and then go to jail.

    That's the only way to prevent it from happening again. These fines are simply buy-ins. Where's the jail time for the white collar crook?

  21. FACE | December 9, 2011

    I applaud the Judge Jed Rakoff's desire to stand up for the public…as well as his bravery!

    I truly hope it's not just a matter of time before he succumbs to offers of "shut-up" money (I personally believe him to be one of upstanding character); and if those attempts fails, threats against him and his family – unfortunately, rarely do the good come away unscathed.

    But I agree with Keith Fitz-Gerald's final statement above – perhaps this will even spark the beginnings of a joint effort amongst judges (and citizens alike) to get more of these "hidden truths" out into the open…and have those – who's erroneous ways caused these economic misfortunes – burden the brunt of responsibility, penalty…and compensation to those wronged!

    FACE

  22. CLARENCE SWINNEY | December 11, 2011

    Fed fund elections–6 months-3 primary– 3 general–free equal tv time–debate A week=12 is enough to evaluate candidates–candidates take nothing of value.

    Congress and White House can take nothing of value. O.

    Regulate Wall Street Gambling. No stake no bet. Invest in vlaue adding.

  23. DrBillLemoine | December 11, 2011

    What is this censorship–posting comments too fast? December 5th to 11th?? It's not like you have an overwhelming volume to police/censor???

  24. Observer | December 12, 2011

    This is the first good sign I have seen in years. The crimes of the big bankers is similar to that of a burgular who breaks into a jewelry store, steals thousands in merchandise, but causes hundreds of thousands in damages as he burns down the place, and fences the goods for a few hundred. The amount of profit wasn't even a cent on the dollar as the world economies were slashed for trillions as the Mozillos and Rubins made hundreds of millions! A century ago we had a crazy rough-rider president who broke up the monopolys and trusts named Teddy Rosevelt. It is doubtful if we are going to find a person of similar courage today to break up the big banks and their friends in congress.

  25. Rich | December 13, 2011

    Your Honor, Judge Jed Rakoff, thanks for standing up to business-as-usual with the giant octopus banks. I've despised CITI from way back. Through this selling and reselling of mortages, they eventually bought our mortgage and most recently foreclosed on us and took away 10 years of "ownership" and probably 60K in equity on our home. And after reading all the other things they did to people I wished so hard that they and their stock symbol would disappear from the future history of banking. From the communications we tried to have with them, I think their policies with homeowners border on draconian.

    Richard

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