The New York Times
March 22, 2011
Woe be to the S.E.C. lawyer who next draws Judge Jed S. Rakoff.
The Manhattan federal judge has again criticized the Securities and Exchange Commission over the way it strikes securities settlements.
On Monday, Judge Rakoff approved a $3 million agreement between the S.E.C. and Vitesse Semiconductor and three former executives over the improper accounting of revenue and the backdating of stock options. At the same time, he had plenty to say about the commission. He again chafed at what he described as the S.E.C. treating the court as a “rubber stamp.”
More significant, much of his opinion was aimed at the boiler-plate language hated by investors but found in nearly every securities regulatory settlement: “without admitting or denying wrongdoing.”
Wall Street firms prefer that language as a defense in shareholder lawsuits, and no doubt it makes it easier for regulators to achieve an enforcement action.
In his opinion, Judge Rakoff gave a quick primer on the history of the settlement practice, finding it origins earlier than what the agency itself said was standard from 1972 on. its legacy has been something less than desirable, he concluded:
The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C. The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them either (though, as one would expect, his supporters feel no such compunction). Only one thing is left certain: the public will never know whether the S.E.C.’s charges are true, at least not in a way that they can take as established by these proceedings.
This might be defensible if all that were involved was a private dispute between private parties. But here an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.”
In the case of Vitesse, Judge Rakoff found the terms of the settlement to be fair, reasonable and in the public interest, even while noting that “the proposal raises difficult questions of whether the S.E.C.’s practice of accepting settlements in which the defendants neither admit nor deny the S.E.C.’s allegations meets the standards necessary for approval by a district court.”
The judge’s skepticism about securities settlements came to the fore in September 2009, when he rejected a proposed $33 million settlement between the agency and Bank of America over its acquisition of Merrill Lynch.
Quoting from Oscar Wilde’s “Lady Windermere’s Fan,” the judge noted in his ruling then that a cynic was someone “who knows the price of everything and the value of nothing.”
He wrote:The proposed Consent Judgment in this case suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.
In February 2010, the judge reluctantly approved a revised $150 million settlement with the bank.