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 proposed Consent Judgment
“is neither fair, nor reasonable, nor adequate, nor in the public interest. Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards. Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.”
In my practice both as an advocate, and as a mediator, 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. Evidently, this has been deemed one of those cases where the public is entitled to a public accounting of Citigroup’s conduct. This decision could therefore be justified as a means of educating the public about the complexities of these financial transactions, as well as satisfying the public’s need for the cathartic experience of seeing banking officials called publicly to account for their actions.
On the other hand, the court may simply be questioning the amount of the monetary settlement in relation to the scale of the investors’ losses, and Citigroup’s profits. From the perspective of a mediator, I prefer to 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 of what are most likely, in such a high profile case, some very competent attorneys.
Mainly I have to 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 factors at trial can impede the discovery of “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? There may be other important considerations that militate against pressing forward with a full-blown trial, even in a case as important to the public as this one. 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? Then there are the delays inherent in insisting on a full-blown trial. Is finding out “the truth” worth the wait until next summer’s trial? Not to mention potentially years of appeals after that.
Even when a case settles for a much different amount than an outside observer expects or thinks should be justified, nobody–not even the judge–should assume that the parties have miscalculated the value of the case. Instead, it makes more sense to assume that the parties are each aware of factors that could cause their case to blow up. Maybe we think this particular case should be worth a billion dollars, not a paltry $285 million. But suppose the parties know of potential defenses that might allow the defendants to walk away scot free. Given that risk, a $285 million verdict could represent a much better result for the government, and the public, than at least some of the possible outcomes at trial. (See this Wall Street Journal piece quoting the SEC’s own assessment of some of these costs and risks.)
It is because these kinds of weaknesses and uncertainties are present in every case, that parties are generally encouraged to settle for a sum that attempts to weigh the likelihoods of a whole range of possible outcomes at trial. If the parties make a reasonable effort to negotiate a resolution, I as a mediator am reluctant to question their result, because I am often not privy to the parties’ knowledge of all of the strengths and weaknesses of their case.
And it is because a whole range of outcomes is possible at trial that I also have to question whether a trial can be assumed to allow “the truth” to emerge, as Judge Rakoff assumes. Certainly, a public trial will 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 where most of the public’s assessment of “the truth” turns out to be directly contrary to the jury verdict. In those cases, what trials prove to the public is 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 this matter.