Robert Khuzami

The official position of Robert Khuzami, the Chief of Enforcement of the SEC, is laid out in a brief asking Judge Rakoff to stay his stinging rejection of the weakling settlement with Citigroup last week pending appeal. The public will suffer because the SEC will have to devote its meager resources to trying a case, so they can’t do other great stuff, like investigate insider trading (57 cases this year, big deal) and ignore dozens of other cookie cutter cases just like the ones they settle for beans. Khuzami made exactly the same argument in a speech to the Consumer Federation of America, where he claimed to be doing his very best and everyone should just get off his back.

The appeal is on shaky ground. I expect Judge Rakoff will inform the SEC of the case of Digital Equipment Corp. V. Desktop Direct, Inc., 511 U.S. 863 (1993), where a unanimous Supreme Court held that an order refusing to give effect to a settlement agreement wasn’t appealable. Perhaps the SEC will devote some of its precious resources to showing why that isn’t the governing rule.

The SEC says that the stay should be granted if there is a likelihood of success on the merits, irreparable injury to someone, and whether a stay will harm the non-appellant or the public. Success on the merits is likely, says the SEC, because no court has ever required proof to sustain a consent order submitted by a US governmental agency. Apparently the SEC is so wonderful that no one has ever questioned it before in a court. Well, anyone besides Judge Rakoff, who has already slapped two of the SECs settlements, the notoriously unfair deal with Bank of America over the proxy statement for the takeover of Merrill Lynch, and its settlement in SEC v. Vitesse Semiconductor Corp.. Now we have Judge Rudolf Randa of Minnesota questioning settlements on the same general grounds.

The entire basis of the request for stay pending appeal is that the SEC is too busy to handle this trial. But think about that for a second. They claim to have done their investigation, so trial is only about pulling things together. What else do their trial lawyers have to do? They only filed a single suit against Goldman Sachs over one ABACUS deal, when Goldman Sachs did a bunch of them, all cookie-cutter deals. They have only filed one suit against any of the investment banks that did the same kinds of deals. They have to go to trial against the individuals they singled out at the solely responsible human at each bank. Here’s my suggestion: quit trying million dollar insider trading cases and go after billion dollar cheats and liars.

And here’s something really rich: their big argument for approving the settlement is that they got most of the relief they would have gotten at trial. Khuzami made the same point in his speech, suggesting that the SEC settles when it gets 85% of what it would get in a trial. That argument doesn’t pass the laugh test. Judge Rakoff rejected the settlement because Citigroup didn’t admit liability. If the SEC prevailed at trial, Citigroup wouldn’t be able to deny liability, and would wind up paying all of the losses suffered by its investors.

Here’s Khuzami talking about the neither admit or deny point at the CFA:

While it is easy to criticize from the sidelines, the practical reality is that many companies would refuse to settle cases if they are required to admit unlawful conduct because that might expose them to additional lawsuits by litigants seeking damages.

Well, if the SEC is getting 85% of what it would get in a trial, why would this matter? Would there be outside litigants willing to try a case for 15% of the losses? If that is a real possibility, why not invite them to sign off on the settlement? I expect that the losers in the Citigroup debacle would be happy to join a settlement that would pay them 85% of their losses, rather than try a civil case in which they would be paying their own lawyers. If they refused, either the SEC is settling too cheaply, or there would be grounds for the SEC to agree to a neither admit nor deny clause.

Khuzami should be thanking Judge Rakoff. The ruling is a lever to force the bad guys to admit their evil, and expose the causes of those losses. Holding people accountable is every bit as important as suing them.