Setting Examples, Not Settling: Toward a New SEC Enforcement Paradigm*
MacDonald, Ross, Texas Law Review
Imagine a world where the only punishment for breaking the law is the payment of a negotiated fine. Imagine further that after paying this fine, you do not even have to admit to being guilty of the crime, no matter how staggering the evidence arrayed against you might be. Add to this the fact that your lawyer, negotiating the fine, used to work for the government entity prosecuting the crime. What is more, the government prosecutor sitting across the table from you will, in a few years time, want a job with the law firm now defending you. Finally, indulge in one more flight of fancy: imagine that you can pay these fines with other people's money. Now, ask yourself, exactly how much of a law-abiding citizen would you be?1
Sadly, this is not a premise for a dystopian, science-fiction movie. This is the current enforcement paradigm of the Securities and Exchange Commission (the Commission), the federal agency predominately tasked with writing, overseeing, and enforcing the rules and regulations that govern the country's financial markets.2 Over the last few decades, the once-feared Division of Enforcement-the law enforcement wing of the Commission- has slowly warped into a meek and abiding Division of Settlement.3 This is a change that has and will continue to have sweeping consequences on the effectiveness of U.S. financial regulations, and through them, the stability of the overall global financial markets.
As a partial riposte to this rigged game-where corporate defendants violate the securities laws, are civilly sanctioned for these violations, and then proceed to violate the laws again in a veritable merry-go-round of fraud-the Honorable Jed S. Rakoffof the Southern District of New York rejected a proposed settlement and consent decree that the Commission had entered into with Citigroup Global Markets on November 28, 2011.4 In this unexpected and controversial move,5 Judge Rakofftook the Commission to task-not for the first time-calling such deals "unfair,"6 "unreasonable,"7 "suggest[ing] a rather cynical relationship between the parties,"8 "done at the expense . . . of the truth,"9 "worse than mindless [and] inherently dangerous,"10 aimed at "suppressing or obscuring the truth,"11 "designed to provide the S.E.C. with the façade of enforcement,"12 and perhaps most damningly, "engine[s] of oppression."13 At the heart of his criticism, though, was Judge Rakoff's belief that such settlements-which in this case imposed a $285 million fine on Citigroup-amounted not to a sanction but to the imposition of a "cost of doing business" on the defendant, a mere inconvenience, and therefore failed to further the public interest in affecting tangible regulatory enforcement.14 This Note addresses Judge Rakoff's concerns. While it is true that the Second Circuit will likely overturn Judge Rakoff's decision in a matter of months,15 owing to the high levels of deference traditionally granted to agency determinations, his opinion nevertheless raises fundamental questions about the soundness of the Commission's settlement policy-questions that demand answers.
The Commission currently settles, in a manner not unlike the scenario described above, roughly 98% of its cases.16 This amounts to between 650 and 700 settlements per year.17 This means that the Commission settles cases at a higher rate than private parties18-even though the Commission's goal is not to vindicate its own private interests, as settlement often does, but to vindicate the interests of the public at large.19 The numbers themselves, then, suggest that there is something foundationally askew.
These settlements-termed consent judgments or consent decrees because the defendant is 'consenting' to an order being entered against it- have three constituent parts. First, the defendant typically agrees to pay a monetary fine and to disgorge any ill-gotten gains.20 Second, the defendant agrees to the issuance of an injunction barring the defendant from violating the securities laws again in the future. …