{"id":2778,"date":"2011-11-30T02:50:32","date_gmt":"2011-11-30T07:50:32","guid":{"rendered":"https:\/\/thebigpictureandthecloseup.com\/?p=2778"},"modified":"2012-03-08T15:42:06","modified_gmt":"2012-03-08T20:42:06","slug":"unnecessary-roughness","status":"publish","type":"post","link":"https:\/\/thebigpictureandthecloseup.com\/?p=2778","title":{"rendered":"Unnecessary Roughness"},"content":{"rendered":"

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Unnecessary Roughness<\/h2>\n

Published in the Maryland Daily Record December 5, 2011<\/p>\n

U.S. District Judge Jed Rakoff would probably be happier with some of the state agencies I regularly deal with than he was last week with the Securities and Exchange Commission.\u00a0 He refused to endorse a settlement<\/a> of an enforcement action by the SEC, in part because the defendant, Citigroup Global Markets Inc., wasn\u2019t required to admit the allegations against it.\u00a0 In my own practice, I tend to encounter the opposite problem.\u00a0 My state regulator adversaries seldom agree to a disposition of an enforcement action without an admission of guilt by my client.\u00a0 Rakoff thus attacked a kind of administrative prosecutorial discretion I\u2019d like to see more of.<\/p>\n

Why The Judge Was Mad<\/h3>\n

The allegations against Citigroup are pretty bad.\u00a0 It\u2019s said that when in 2007 Citigroup held a load of mortgage-backed securities it well knew to be dubious, Citigroup arranged for some allegedly independent but secretly paid-off expert to tout the vitality of these stinkeroos, tricking investors into taking them off Citigroup\u2019s hands.\u00a0 Citigroup then sold short against the very securities it was about to dump.\u00a0 After the securities did what Citigroup knew they would do, i.e. tanked, the final score (allegedly) was Citigroup: $160 million profits, Investors: $700 million losses.<\/p>\n

Rakoff was annoyed with the settlement because Citigroup was charged only with negligence, not fraud (only its employee was charged with fraud).\u00a0 Investors can\u2019t sue for mere negligence.\u00a0 Moreover, the settlement would have forced the disgorgement of Citigroup\u2019s profits plus interest, but would not have necessarily landed a single penny back in the pockets of the investors.\u00a0 Third, and most upsetting to the judge, the settlement would have had zero collateral estoppel effect.\u00a0 The settlement would have given investors suing Citigroup no established factual basis for their own fraud actions. They would have had to have proved their cases from scratch.<\/p>\n

Of course, Citigroup also promised never to do in future what it neither admitted nor denied having done in the past, and agreed to be enjoined.\u00a0 That agreed injunction was Judge Rakoff\u2019s way in; as every litigator knows, an injunction can only be granted after the court takes the public interest into account.\u00a0 And Rakoff found that the public interest would not be served if Citigroup admitted nothing, particularly if the investors were not made whole.<\/p>\n

Why The Judge Was Wrong<\/h3>\n

I wish Rakoff had stayed with his first two gripes, which I think were legitimate.\u00a0 The timidity of SEC in undercharging Citigroup and in not trying to build restitution to defrauded investors into the settlement seems unfortunate.\u00a0 But saying that there was a public interest in admissions went too far.<\/p>\n

For one thing, the whole point of a settlement is to leave something on the table for each side.\u00a0 For a person or company at the receiving end of an administrative enforcement action, that something can take the form of facts not admitted.\u00a0 It is a natural quid pro quo<\/em>.\u00a0 Usually, the agency will get the sanction it seeks.\u00a0 And usually, not admitting facts protects against grave practical consequences.<\/p>\n

Nothing Collateral About Collateral Damage<\/h3>\n

Typically, the consequences when facts are<\/em> admitted are collateral.\u00a0 The statutory sanction the agency seeks and will typically receive in a settlement (delicensure of a professional, fines and disgorgement for a corporation, and the like) will be direct.\u00a0 But if facts are admitted, the damage to the regulatee will go on in ways not contemplated by the agency\u2019s own organic statute.<\/p>\n

For example, even if the professional is re-licensed someday, he or she may be unable to obtain, directly or indirectly, federal reimbursement \u2013 which in many practices, including medicine, is a death sentence.\u00a0 A government contractor may be debarred, another kind of death sentence.\u00a0 Admitted facts may lay a company like Citigroup open to huge claims through collateral estoppel.\u00a0 Risks may become uninsurable.\u00a0 Financing may become unavailable.\u00a0 Individuals may be deported. \u00a0And above and beyond these consequences, there is the damage to reputation and to pride.<\/p>\n

Typically, as noted, the agency\u2019s founding statute charters it to pursue none of these consequences.\u00a0 Yet administrative prosecutors and\/or regulators who insist on found facts are knowingly inflicting them.<\/p>\n

Blood Lust<\/h3>\n

This unnecessary roughness, I maintain, is not<\/em> in the public interest.\u00a0 That interest, established by thousands of disciplinary statutes, should begin and end with the linkage articulated in those statutes between specified misbehavior and specified sanctions.\u00a0 Those sanctions are the only consequences in which the law establishes a public interest.\u00a0 With those sanctions achieved, the establishment of the facts of the misbehavior \u2013 at least by the prosecutor or agency in question \u2013 is not important.<\/p>\n

Why then is it pursued?\u00a0 Often, I believe, from the conscious desire to inflict those collateral consequences, a blood-lust to stigmatize.\u00a0 I\u2019ve seen prosecutors self-righteously bent on taking errant professionals \u201coff the road\u201d to greater extents than the laws they are supposed to enforce warrant.\u00a0 And I\u2019ve definitely seen regulators afraid of being tagged as the ones on whose watch some malefactor got off insufficiently stigmatized.<\/p>\n

Am I saying then that the public has no interest in finding out what really happened?\u00a0 For instance, is there no public interest in getting to the bottom of Citigroup\u2019s alleged mammoth pump-and-dump?\u00a0 No, I think the public does have an interest, and a Congressional hearing or a journalistic investigation would be an appropriate way of vindicating it \u2013 not to mention what comes out of private lawsuits.\u00a0 But prosecutions, administrative or otherwise, serve a different aspect of the public interest, namely in protecting the public by sanctioning certain kinds of misbehavior.\u00a0 The fact-finding function is purely incidental to that service.<\/p>\n

No Incentive To Settle<\/h3>\n

Practically speaking, if the incidental fact-finding is not allowed to be dispensed with in settlement, it leaves most regulatees very little reason to settle.\u00a0 If the administrative prosecutor or the regulatory board insists on the statutory sanction plus admissions of all facts, the settlement is nothing more than a surrender.\u00a0 And why should the regulatee who can afford a legal defense just surrender \u2013 at least when there remains the faintest chance of a successful defense?\u00a0 The inefficiency of the resulting trial in terms of the time and cost to both sides (one financed by taxpayers, let\u2019s not forget) is considerable.<\/p>\n

In fact, even the word surrender may not always capture the essence of the prosecutorial overkill.\u00a0 Many professionals, once charged with misconduct, cannot merely unconditionally surrender their licenses; boards will not even accept the surrender without admissions being made.\u00a0 It becomes a strange conditional surrender, in which, contrary to the usages in warfare, the victor sets the conditions.\u00a0 Unless the professional gives the demanded admissions, the professional must withstand an administrative trial he or she does not even wish to contest.\u00a0 This is show-trial time; this is madness.<\/p>\n

Enough With The Mea Culpas<\/h3>\n

One can applaud Judge Rakoff for trying to make SEC get a backbone.\u00a0 If the SEC had insisted on restitution, one can guess Rakoff would not have harped on admissions.\u00a0 But the SEC didn\u2019t do that, drawing the judge off-base.\u00a0 It would be unfortunate if this high profile case further increased the respectability of the practice of shaking down regulatees for admissions when the regulators are already getting, practically speaking, everything they wanted.<\/p>\n

They should be encouraged to take yes for an answer, without a particularized mea culpa<\/em> attached.<\/p>\n

Copyright (c) Jack L. B. Gohn<\/p>\n

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The public interest, established by thousands of disciplinary statutes, should begin and end with the linkage between specified misbehavior and specified sanctions. With those sanctions achieved, the establishment of the facts of the misbehavior \u2013 at least by the prosecutor or agency in question \u2013 is not important. Why then is it pursued? Often, I believe, from the conscious desire to inflict those collateral consequences, a blood-lust to stigmatize. <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[3129,3119,3132,3126,3133,3123,3120,3127,3125,3115,3134,3116,3130,794,3135,3128,3121,3131,3122,3118,3117,3124,3136],"class_list":["post-2778","post","type-post","status-publish","format-standard","hentry","category-bigpicture","tag-admissions","tag-citigroup-global-markets","tag-collateral-consequences","tag-collateral-estoppel","tag-congressional-hearing","tag-disgorgement","tag-inc","tag-injunction","tag-investors","tag-jed-rakoff","tag-journalistic-investigation","tag-judge-jed-rakoff","tag-licensure","tag-prosecutorial-discretion","tag-prosecutorial-overkill","tag-public-interest","tag-pump-and-dump","tag-reimbursement","tag-restitution","tag-sec","tag-securities-and-exchange-commission","tag-settlements","tag-surrender-of-license"],"_links":{"self":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts\/2778","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2778"}],"version-history":[{"count":16,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts\/2778\/revisions"}],"predecessor-version":[{"id":2942,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts\/2778\/revisions\/2942"}],"wp:attachment":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2778"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2778"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2778"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}