I’m actually really enjoying the last stand of Jed Rakoff. He’s the federal judge who has engaged in a lonely crusade against the SEC’s practice of slap-on-the-wrist settlements against the nation’s largest financial firms. The SEC and Citigroup took Rakoff to court, essentially, to get their settlement on some mortgage-backed securities deals approved. Rakoff refused to approve the deal, because, among other things, he objected to the fact that Citi didn’t have to admit wrongdoing, and he was barred from seeing the necessary evidence to determine the fairness of the deal.

Rakoff has a lawyer now, and he argued before the 2nd Circuit Court of Appeals that he required more information to properly conduct oversight:

U.S. District Court Judge Jed Rakoff doesn’t need an admission of guilt in order to approve a controversial Citigroup settlement with government regulators — just evidence to determine whether the closed-door deal is fair [...]

In this case, Citigroup is accused of marketing toxic mortgage bonds to customers while secretly betting against those same investments. Rakoff rejected the proposed $285 million deal in November and ordered a trial. The SEC and Citigroup appealed, arguing that it isn’t a court’s role to dictate how the agency should settle its cases.

If defendants were required to admit guilt as a condition of a settlement, “other frauds might never be investigated or be investigated more slowly because limited agency resources are tied up in litigating a case that could have been resolved,” the SEC said in its appeal.

Sadly, the Second Circuit is likely to side with Citi and the SEC, if we go by their preliminary ruling in the case. But Rakoff, in this statement before the court, objected to the effort by the SEC and Citi to bigfoot the court empowered to approve the settlement. The regulators and the banks want judges to act as a rubber stamp for deals negotiated in secret:

“[T]he district court reiterated throughout its opinion that it was simply unable to fulfill its obligation in this particular case to independently determine whether the proposed consent judgment was fair, adequate, reasonable, and in the public interest, when it had not been provided with any ‘evidentiary basis,’ any ‘factual base,’ ‘any proven or acknowledged facts,’ or any other factual showing whatsoever on which to make the requisite determination.”

Rakoff associated the $550 million SEC settlement against Goldman Sachs, on a similar mortgage backed securities deal, to this $285 million one from Citi, saying he had no basis to determine the reasoning for why one was almost half the size of the other.

Rakoff happened to preside over the jury trial against Citi employee Brian Stoker, on these very deals. The jury ended up acquitting Stoker, but made an unusual plea in a note to the SEC urging them to find and prosecute those who fraudulently caused the financial crisis.

So the only way that Rakoff could get the information to judge the appropriateness of the Citi settlement came from a separate lawsuit against Citi. The upshot here is that the SEC wants judges to pipe down and let them make deals with the financial industry for toothless settlements. Rakoff has caused a lot of grief inside the regulator for his refusal.