Judge Jed Rakoff of the Southern District of New York today rejected a proposed consent judgment and $285 million settlement of an SEC enforcement action against Citigroup. The SEC alleged that Citigroup had defrauded investors in a fund comprised of toxic assets, but was willing to accept a monetary settlement and injunction without requiring Citigroup to admit the truth of these allegations. In this case, the court disapproved this longstanding practice, in its words, "hallowed by history, but not by reason." The court's opinion determined that the settlement did not provide sufficient knowledge of the underlying facts, and thus would deprive the public "of ever knowing the truth in a matter of obvious public importance." The judge also seemed to think that the settlement amount was inadequate. No doubt a lot of people will applaud the judge's apparent efforts to stick it to Wall Street, but I always find it somewhat disconcerting when a judge takes it upon himself to impose a result on the parties that neither side sought or wants, in this case forcing both parties to assume the extraordinary costs and risks of trial in a case that both sides would prefer to settle. At the same time, I do understand that the court must consider the interests of the public as well as the parties.
I question the assumption, repeated several times in the
court's opinion, that a public trial is going to allow the public to
know "the truth," as well as the assumption that knowing "the truth," if
indeed truth is ascertainable at trial, is a more important value to
the public than peace. Many things can happen at a trial that can interfere with finding "the truth." What if, for example, a crucial witness for either side presents a poor appearance? Or an especially strong
appearance? What if a crucial witness disappears? What about the
contradictory comments that always show up in the voluminous
documentation involved in a case like this one? And what about other factors that might militate against pressing
forward with a full-blown trial? Think, for example, of potentially
millions in costs and legal fees each side must now incur. Would it be
more productive for Citigroup to avoid those costs? Does the government
have other more pressing priorities to devote its scarce enforcement
resources? Is finding out "the truth" worth the wait until next summer's
trial? Not to mention potentially years of appeals after that.
As a mediator, I generally assume the parties to a negotiated agreement are in the best position to assess the strengths and weaknesses of their case, and that such an agreement is generally going to represent a fair approximation of the costs and risks to both sides of going to trial. To assume otherwise, as Judge Rakoff does, amounts to second-guessing the careful calculations what are most likely, in such a high profile case, some very competent attorneys.
On the other hand, public trials do serve a number of important purposes, even when we cannot be certain that a trial will produce a better end result for the public than a negotiated settlement. Judge Rakoff's decision can be justified on the ground that a trial will help educate the public about the complexities of these financial transactions, and may also satisfy the public's need for the cathartic experience of watching banking officials called publicly to account for their actions. A trial will also allow
the public to make its own assessment of a mountain of possibly
conflicting facts and competing versions of the truth. But we have also seen plenty of very public trials
result in a jury verdict directly contrary to what much of the public conceives as "the truth." Those trials prove
to the public that they are exactly the opposite of a method for
finding "the truth." When this particular trial is over, my guess is
that the public will still be arguing over the meaning of "the truth" of
(excerpted from a post on my mediation blog)