District Court Cites Judge Rakoff and Questions Its Role in Approving a Proposed SEC Settlement
Raphael Rosenblatt | Bloomberg Law
Responding to questions by Judge Frederic Block of the U.S. District Court for the Eastern District of New York, the Securities and Exchange Commission (SEC) submitted a letter memorandum encouraging the Court to accept a proposed settlement between the SEC and two defendants accused of securities fraud.
Ralph Cioffi was a senior portfolio manager, and Matthew Tannin was a portfolio manager at Bear Stearns. Both were charged by the SEC with misrepresenting the extent to which funds had been invested in securities backed by subprime mortgages. Cioffi and Tannin (together, Defendants) also were accused of certain misrepresentations or omissions as to Bear Stearns investors. Defendants also were charged in a parallel criminal action, but wereacquitted after trial in November 2009. The SEC civil enforcement action continued against Defendants, and a jury trial was scheduled to commence on February 13, 2012.
On January 23, 2012, the SEC and Defendants informed the Court that a proposed settlement had been reached. Judge Block convened a hearing on February 13, 2012 to discuss whether the settlement was fair and, more specifically, a court’s role when presented with a proposed settlement. According to the parties, the proposed settlement required Cioffi to pay disgorgement of $700,000 plus a $100,000 penalty, while Tannin was obligated to pay $200,000 and a $50,000 penalty. Defendants also would be subject to an injunction permanently enjoining them from violating the antifraud provision of the Securities Act of 1933 (Securities Act), and they would be barred from associating with any investment adviser, broker-dealer, or other regulated entity for a period of time.
Judge Block’s Concerns
During the hearing, Judge Block first noted that the parties had reached the proposed settlement at “almost the eleventh hour, the tenth-and-a-half hour.” This concerned the Court because it had carved out significant time for the trial, and “it’s very hard to get a case to fill in on short notice.” Judge Block distinguished between scheduled criminal trials, when a defendant’s liberty is at stake, and civil trials.
Of more concern to Judge Block than mere scheduling, however, was the proposed settlement itself. First, he questioned why the SEC would consent to settle the matter for just over $1 million, a sum the Court described as “chump change,” if the SEC claimed that Defendants’ activity caused $1.8 billion in investor losses.
Judge Block then cited Judge Rakoff and wondered “what the role of the Court is when the Court is being asked to sign off and give its consent to [a settlement].” Noting that no judge wants to be merely a “rubber stamp,” Judge Block asked the parties:
[W]hat do you envision the role of the Court is, especially when you have an injunctive aspect in the consent agreement that simply says: Don’t violate the law.
I mean, obviously, you’re not allowed to violate the law. But that consent denotes — that permission seems to be giving ice in the wintertime.
The Court wondered whether its involvement was necessary in the first instance, because “I mean, I can’t stop civil litigants from settling their claims. The difference is that when you ask a judge to sign off is that we then retain jurisdiction. Is there any reason why I should do that?” Wanting to avoid being “just a rubber stamp,” Judge Block wondered aloud whether or not there was some “inquiry I ought to be making about these provisions? About the fairness of it? Or the reasonableness of it?” Noting that he did not necessarily agree with everything Judge Rakoff wrote when he questioned the SEC’s settlement with Citigroup Global Markets, Inc., Judge Block asked what role the parties envisioned the Court playing in terms of the proposed settlement.
The Court noted that although it was inclined to “sign off on [the settlement],” it requested a letter memorandum from the SEC and Defendants “in light of Judge Rakoff’s standards, which I may not totally agree with.”
On February 21, 2012, both the SEC and Defendants submitted letter memoranda responding to Judge Block’s questions and concerns. Defendants noted the deference courts should show a government agency “charged with enforcing the statute at issue” that is a party to a settlement and determines that the case should be settled rather than go to trial. The SEC’s letter memoranda was slightly more detailed, and set forth the terms of the proposed settlement. The SEC noted that, contrary to the concerns of Judge Block, “proposed consent decrees lacking an admission of liability by the defendant, far from being suspect, are the norm and to be expected.” According to the SEC, the settlement is fair, adequate, and reasonable.
With regard to the injunction, the SEC explained that injunctions not to violate the antifraud provisions of the Securities Act are proper and legally required “for the [SEC's] follow-on issuance of comprehensive administrative bars against Cioffi and Tannin.” Moreover, because the SEC does not recover damages, and proof of victims’ loss is not an element of an SEC enforcement action, the proposed payments by Defendants were a close approximation of what the SEC could expect to recover if the case were litigated through trial. Addressing Judge Block’s primary concern, the SEC explained: “while judicial review of the proposed consent judgment is not a mere rubber stamp, the review, as discussed above, is limited, because the deference owed to agencies has a constitutional dimension.”
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