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Bank of America’s Penalty Misses the Point

The U.S. Justice Department just got Bank of America Corp. to pay about $16 billion to settle charges of selling defective mortgages to investors. The size of the penalty is impressive, and it comes on top of Justice’s other recent big-bank fines, including JPMorgan Chase & Co.’s $13 billion and Citigroup Inc.’s $7 billion. All told, Bank of America will have forfeited about $70 billlion to end legal actions over mortgage lending, much of it stemming from its 2008 purchase of Countrywide Financial Corp. In one way, Wall Street has paid dearly for the misdeeds that led the global economy to crash in 2008. But has the cause of justice been well served? That’s debatable. More on Bloomberg [...]

Law and the Truth: A Judge’s Whine

SOMETIMES it is not easy for a judge to both fulfil the requirements of his job and splash enough ink in the process to launch a debate. Jed Rakoff, a district judge in New York (pictured), managed just that after he was forced by a federal appeals court to rubber-stamp a $285m settlement between Citigroup and the Securities and Exchange Commission (SEC). “The court has now fixed the menu, leaving this court with nothing but sour grapes,” writes Mr Rakoff in a ruling published on August 5th. But the mischievous judge then uses the rest of his three-page opinion to attack the higher court’s command for being superficial, unworkable, and irresponsible. It forces, he argues, the judiciary to extend its enforcement powers while at the same time gutting its ability to oversee how they are used. More on The Economist [...]

Judge Rakoff of Southern District of New York Continues to Question Adequacy of Judicial Oversight of SEC

On remand of his rejection of the proposed Consent Judgment between the SEC and Citigroup Global Markets, Judge Jed Rakoff of the United States District Court for the Southern District of New York expressed additional misgivings about effective judicial oversight of the SEC. In his opinion issued August 5, 2014, Judge Rakoff noted that the Court of Appeals “who must be obeyed have spoken, and this Court’s duty is to faithfully fulfill that mandate.” In faithfully fulfilling that mandate and approving the Consent Judgment, however, Judge Rakoff expressed his “fears that, as a result of the Court of Appeal’s decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever.” He further questioned the Court of Appeal’s direction that the SEC could avoid judicial review entirely by proceeding solely on an administrative basis. “One might wonder: from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?” His question is particularly pertinent in light of the SEC’s statements that it intends to pursue more actions administratively than it has in the past and echoes Judge Rakoff’s July 11, 2011, denial of the SEC’s motion to dismiss in Gupta v. Securities and Exchange Comm’n on the grounds that proceeding administratively against one defendant while trying all others in federal court could violate the Equal Protection Clause of the Constitution. More in the National Law Review [...]

Picard Says Funds Can’t Skirt $10M Madoff Clawback Suit

Madoff wind-down trustee Irving Picard asked a New York bankruptcy court Tuesday not to dismiss a $10 million clawback claim, saying the defendants, a group of individual trusts, are mistakenly fixating on a good-faith issue that’s not applicable. Picard says the defendants were transferred $10 million in the last two years. The funds seek to dismiss that clawback claim on good-faith grounds, but attorneys for Picard say the validity of the claim has nothing to do with good faith. Instead, they say, it centers on value, a separate element required for a successful defense against the claim. “The issue in the defendants’ motion — to which we responded today — is solely about value, not whether the defendants received transfers in good faith,” BakerHostetler’s Dominic Gentile, an attorney for the SIPA trustee, told Law360 on Wednesday. More on Law360 [...]

Judge approves $285M Citigroup-SEC settlement

A federal judge reluctantly approved a $285 million settlement between Citigroup and the Securities and Exchange Commission Tuesday over allegations that the global bank misled investors on a $1 billion package of mortgage bonds. U.S. District Court Judge Jed Rakoff acted two months after a federal appeals court ruled that he had shown an “abuse of discretion” by blocking the 2011 settlement in an earlier ruling. Rakoff initially refused to sign off on legal grounds that the two sides hadn’t given him enough information to determine whether the settlement was fair and “in the public interest.” He also criticized the SEC’s failure to require Citigroup to acknowledge wrongdoing as a condition of the deal. More on USA Today [...]

The SEC as Prosecutor and Judge

A year after vowing to take more of its law-enforcement cases to trial, Securities and Exchange Commission officials now say the agency will increasingly bypass courts and juries by prosecuting wrongdoers in hearings before SEC administrative law judges, also known as ALJs. “I think you’ll see that more and more in the future,” SEC Enforcement Director Andrew Ceresney told a June gathering of Washington lawyers, adding that insider trading cases were especially likely to go before administrative judges. The 2010 Dodd-Frank law vastly expanded SEC discretion to charge wrongdoers administratively, and this summer the agency increased the number of administrative law judges on staff to five from three in anticipation of an increased workload. This follows a recent string of SEC jury-trial losses in federal courts, though agency officials insist the timing is coincidental. Coincidence or not, a surge in administrative prosecutions should alarm anyone who values jury trials, due process and the constitutional separation of powers. The SEC often prefers to avoid judicial oversight and exploit the convenience of punishing alleged lawbreakers by administrative means, but doing so is unconstitutional. And if courts allow the SEC to get away with it, other executive-branch agencies are sure to follow. More in the Wall Street Journal [...]

SEC Settles With Agency Atty Over Madoff Documents

The U.S. Securities and Exchange Commission has settled a lawsuit by an agency attorney seeking documents related to its failure to uncover the massive Bernie Madoff Ponzi scheme, according to a Monday court filing. The SEC and plaintiff Kathleen Furey, senior counsel at the agency, announced they had settled the case “in principle” in a one-page letter to the court. Exact terms of the deal were not disclosed. Furey filed suit in September 2013, seeking documents purportedly showing that the SEC’s New York regional office whiffed on the Madoff investigation because it had a policy against pursuing investment management cases between January 2002 and December 2008, when the Ponzi scheme first came to light. Furey is the sole SEC attorney in the New York office supporting the investment management examination group, according to her LinkedIn page. More on Law360 [...]

Wreck of Cards

A law of political physics is that a regulator will always find something new to justify its existence, whether or not it’s needed. Witness the plan by the Financial Industry Regulatory Authority (Finra) to gather account information each month from America’s roughly 4,000 brokerage firms. Known as the Comprehensive Automated Risk Data System (Cards), this experiment in big data is intended to allow “birds-eye view surveillance,” said Finra chief Richard Ketchum in May. “CARDS will allow us to collect and manage data from firms in such a way that we can quickly identify trends and product concentrations that are harmful to investors and take swift, responsive action.” Finra is the “self-regulatory organization” that polices the securities industry. Overseen by the Securities and Exchange Commission, it is considered a state actor by some judges but operates as a private, nonprofit organization of member firms. And those firms, especially small ones, are fretting about new compliance costs and privacy risks. More in the Wall Street Journal [...]

ALERT:

H.R. 3482 – Restoring Main Street Investor Protection and Confidence Act
New Co-Sponsor: Representative Christopher Smith [R-NJ4]. This brings the number of co-sponsors to date to 51. If your representative is currently not co-sponsoring H.R. 3482 (click here for a list of current co-sponsors), we urge you to visit www.fixsipcnow.org to write your representative, and follow up with a call to their [...]

Brokers’ Dealings With Older Investors Get More Scrutiny

The Massachusetts securities regulator wants to know how often older investors complain to their securities firms, and what the firms do about it. The Massachusetts Securities Division sent a questionnaire to 162 brokerage firms asking about complaints received from clients 65 or older over the past two years, including what products those complaints were related to. The regulators also want to know whether firms have policies and procedures that would amount to heightened oversight about transactions by senior investors. More in the Wall Street Journal [...]