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Tuesday, November 29, 2011

The Cost of Doing Business

Among the financial shenanihoots that helped bring down the world financial system was a scheme by Citigroup to sell investments that were designed to fail so that the company could bet against them and reap huge profits.  The Securities and Exchange Commission took a dim view of this and filed suit against Citigroup.  The two parties agreed to settle the lawsuit: Citigroup would pay a $285 million fine, without admitting to any wrongdoing.  All that was left was for Federal Judge Jed S. Rakoff to sign off on the deal.  Yesterday, however, Judge Rakoff rejected this agreement.

Good for him.

The agreement bothered Judge Rakoff because he was asked, essentially, to serve as a "rubber stamp."  Despite the fact that the SEC alleged that Citigroup had committed fraud, the agreement provided insufficient specifics, and the company was not required to admit wrongdoing.  Therefore, the judge could not determine whether the agreement was “fair, reasonable, adequate and in the public interest."  And about that whole, "Is it in the public interest" question?  Let me save you some trouble, Judge Rakoff: It's not.

The judge correctly pointed out that, while $285 million may sound like a lot of money, it's basically pocket change to a company like Citigroup.  And paying such a fine--particularly if a settlement does not require a company to admit wrongdoing--can be written off as an acceptable cost of doing business.  The SEC wants to settle the cases because the agency worries--understandably--that it cannot win a trial against a company with the vast legal and financial resources of Citigroup.  A bird in the hand--or 285 million birds--is worth some even more hefty amount in the bush.

Except it's not.

If the government took Citigroup--or AIG or Bank of America or any of the other malefactors of great wealth--to trial, nobody knows what would happen.  The government might very well lose the case.  I suspect, though, they might not.  And at any rate, going to trial would send a message that the costs of doing business might turn out higher than Citigroup might like to pay.  Obviously, these petty-cash fines don't convince the wrongdoers to change their evil ways.

So Judge Jed Rakoff did his job.  Now it's time for the SEC to do theirs.

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