Analysis: NY federal judge an outlier in challenging SEC

Tue Nov 29, 2011 5:14pm EST
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By Grant McCool

NEW YORK (Reuters) - Judge Jed Rakoff's blunt rejection of a major Citigroup Inc (C.N: Quote) securities fraud settlement could resonate with other judges who share the public's frustration with Wall Street and its regulators.

Rakoff is considered an outlier on the federal bench, a judge who rails against the U.S. Securities and Exchange Commission's policy of settling almost all lawsuits without defendants admitting wrongdoing.

Courts have typically approved similar pacts between government agencies and corporate defendants with few questions.

But Rakoff's order on Monday blocking the proposed $285 million settlement over the sale of toxic mortgage debt was a populist decision that could influence other judges.

This is the second time in two years that he has rejected a high-profile SEC settlement.

"It's man bites dog. Judge bites agency," said Professor Adam Pritchard, of the University of Michigan Law School. "You haven't heard about this sort of thing before because it doesn't happen."

In striking down the SEC's $33 million settlement with Bank of America (BAC.N: Quote) over its failure to disclose that it had authorized bonus payments to Merrill Lynch employees as part of its takeover of Merrill in 2009, Rakoff said it unfairly punished shareholders. He later approved a $150 million pact.

Some judges recently have made strong interventions in settlements, but not those involving allegations of securities fraud.   Continued...