Peter J. Henning has a somewhat rambling but informative item in the NYT ‘s Dealbook about the hot new trend of federal judges refusing to sign off on settlement agreements between the Securities and Exchange Commission and the banks it regulates. The trailblazer here was Judge Jed Rakoff, who last year declined to put his imprimatur on a $33 million agreement between the SEC and Bank of America, over the issue of when shareholders were told about bonuses that would be paid when BofA took over Merrill Lynch. In part, this was because Rakoff couldn’t understand the logic of a settlement that charged that the bank had screwed its shareholders but that no individual person had. In a quote I’d like to see inscribed on SEC headquarters, Rakoff asked: “Was it some sort of ghost?”
Now other judges are getting into the act. Judge Ellen Huvelle, in a case involving Citigroup, reportedly said : “You expect the court to rubber-stamp, but we can’t.” And yesterday, Judge Emmet Sullivan similarly balked in a case involving Barclays. (UPDATE: Sullivan apparently changed his mind on Wednesday. )
What’s bothersome about the Henning piece is that it treats this wave of judicial assertion as something to be avoided. He predicts that the trend could mean that the SEC “will have to be more careful in the terms it agrees to and does a better job in explaining to federal courts why they should approve the proposed resolution. There may be another way to avoid this problem.”
Problem? Why is forcing the SEC to be more careful and transparent a problem? The collusion over the last decade between the SEC and the companies it is supposed to police is one of the fullest examples of regulatory capture I can think of; anything that breaks up that coziness is a solution, not a problem. And it’s not like coming up with plausible explanations for its actions is going to slow the agency down; these judicial reviews are required in only a small number of SEC cases.
Still, Henning’s piece does provide a little-known nugget: a provision of the Dodd-Frank Act (Section 929p) gives the SEC authority to assess civil fines in an administrative procedure, without going through a judge. I can see how the intent here might have been,as the law’s language puts it, “strengthening enforcement by the Commission.” But Henning presents what seems to be a viable way to use it do an end-run around these pesky judges, and that does not strike me as a step in the right direction.
