White Collar Crime Calathes & Yeager Articles

Sweetheart Settlements, the Financial Crisis, and Impunity: A Case ... Calathes, William;Yeager, Matthew G Social Justice; 20İ6; 42, 1; ProQuest pg. 53

Sweetheart Settlements, the Financial Crisis, and Impunity: A Case Study of SEC v. Citigroup Global Markets, Inc.

William Calathes & Matthew G. Yeager*

* William Calathes (email: [email protected]) is a Professor of Criminal Justice, New Jersey City University, with interests in white-collar crime, drug enforcement, community corrections, firearm laws, and the death penalty. Matthew G. Yeager (email: [email protected]) is an Associate Professor of Sociology and Criminology, King’s University College, Ontario, Canada, with interests in the sociology of law, sentencing, crimes of the powerful, dangerous offenders, and political economy.

Social Justice Vol. 42, No. 1 53

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T his article highlights the case of SEC v. Citigroup, in which the defen­ dants accepted a consent decree for fraudulently issuing a collateralized debt obligation (CDO) without admitting or denying guilt. The US District Court judge, Jed Rakoff, rejected the decree, arguing that there was insufficient

information to determine whether it was fair, adequate, reasonable, and in the public interest. In this case study, we examine the SEC’s practice of settling enforcement actions that allege serious patterns of fraud. We find that corporate and bank fraud is successfully diverted from the criminal courts to the civil fraud arena, taking the form of “consent decrees” in which the offending party negotiates a penalty, usually in the form of a modest fine without an admission of liability. The Second Circuit US Court of Appeals affirmed this process, concluding that what is required is to ensure the decree is procedurally proper. This controversy over the Rakoff ruling allows a discussion of a broad set of issues regarding law and capitalism, and begins with a 2011 lawsuit.

On October 19,2011, the primary regulator of securities markets in the United States, the Securities and Exchange Commission (SEC), filed a lawsuit accusing one of the world’s largest banks, Citigroup Global Markets, Inc. (Citigroup), of securities fraud over mortgage investments. The complaint alleged that following its early 2007 realization that the mortgage-based securities market was weakening, Citigroup created a billion-dollar fund known as Class V Funding III (Class V) that allowed it to dump questionable CDO assets on misinformed investors. CDOs are financial tools used by banks to repackage individual loans into a product that can be sold to investors on the secondary market. These packages often consist of auto loans, credit card debt, mortgages, or corporate debt. The term “collateralized” is used because the promised repayment of the loans is the collateral that gives the CDO its “value.” The SEC charged Citigroup’s principal US broker-dealer subsidiary with misleading investors about a $1 billion CDO tied to the housing

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market in which Citigroup bet against investors as the housing market showed signs of distress (see SEC Enforcement Actions 2013).

The risky bets of Wall Street firms have had a dramatic and negative effect on the United States (see, e.g., Schumer 2007).They were central to the unprecedented siphoning off of money from the middle and lower-middle classes by elites (the one-half of one percent by income). In 2008, the US financial markets experienced a series of cataclysmic events that still affect the economy in 2015. “Many factors influenced the global meltdown, including flawed financial policies, law-breaking, greed, irresponsibility, and not an inconsiderable amount of concerted ignorance and outright stupidity” (Pontell, Black, and Geis 2014,1). The primary precipitating factors in the financial crisis, the Treasury Department concluded, were “the lack of regulatory oversight, the risky bets of many Wall Street firms, and [the faux] transparency in the selling of collateralized debt obligations (CDOs) and mortgage- backed securities by banks, investment banks, and other financial institutions” (Barclift 2011,449).

The SEC charged Citigroup with violating antifraud provisions of the Securities Act of 1933. This complaint alleged that marketing materials for Class V were materially misleading because they represented that a third party had selected the underlying investment portfolio and did not disclose a short position by Citigroup on the $500 million in assets that it helped to select and from which it stood to profit if the assets performed poorly. The SEC claimed that Citigroup realized a net profit of around $160 million due to structuring the fund in this manner, while investors lost more than $700 million (SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328, S.D.N.Y. 2011).

The SEC is the primary regulatory agency charged with enforcing the laws governing the capital markets in the United States. Currently, it settles roughly 98 percent of its cases, or 650 and 700 settlements per year (Overdahl and Buckberg 2012,5). This means that the SEC settles cases at a higher rate than private parties do (Galenter and Cahill 1994), even though the SEC’s goal is not to vindicate its own private interests, but to protect the interests of the public at large (see, e.g., The Investor’s Advocate 2012).

In Citigroup, the SEC submitted a proposed consent decree on the same day as it filed its complaint, and Citigroup, “without admitting or denying the allegations of the complaint,” consented to the entry of a final judgment that ordered three forms of relief (SEC v. Citigroup Global Markets 2011, 330). First, the judgment permanently enjoined Citigroup from violating the Securities Act. Second, it ordered Citigroup to disgorge $160 million, pay $30 million in prejudgment interest, and pay a $95 million penalty, all of which would be placed into a Fair Fund for injured investors. Third, it ordered Citigroup to fortify its approval processes for initial offerings of residential mortgage-related securities, to enhance the role of legal counsel and compliance officers in reviewing the marketing materials for such securities, and to demonstrate its compliance with these undertakings by submitting

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to audits and to monitoring by the SEC. As a matter of civil procedure, a federal court judge must approve such a consent decree.

Judge Rakoff rejected the proposed fraud settlement between the SEC and Citigroup on the grounds that it failed to adequately serve the greater public interest because it did not require the bank to admit or deny liability. Specifically, neither party had provided sufficient information to determine whether the proposed consent agreement was in the public interest. Hence, Judge Rakoff ordered the parties to prepare for trial to enable a full review of the facts underlying the case. This deci­ sion broke with longstanding judicial deference to SEC settlements and challenged some of the fundamental assumptions behind the SEC’s approach to enforcement of securities laws against ongoing businesses and financial institutions.

Then, in an unusual move, the SEC and Citigroup appealed Judge Rakoff’s decision to the Second Circuit Court of the US Court of Appeals. This appeal represented a breakdown of the adversary process since both parties were on the same side seeking the same relief (Kelleher, Hall, and Bradley 2012). The joint appeal of Judge Rakoff’s ruling raises the critical question of whether the SEC can be a guardian of the public interest and whether justice can be better served in cases such as this by avoiding litigation. The authors of this article, with a historic interest in state-corporate crime, filed an amicus curiae brief in support of Judge Rakoff’s ruling. We argued that the district court’s rejection of the parties’ consent decree was very much in the public interest (Yeager and Calathes 2013).

The Court of Appeals stayed the case while it considered the questions presented by the appeal, ruling that the SEC and Citigroup had a high likelihood of success on the merits (SEC v. Citigroup Global Markets, Inc., 673 F.3d 158,2nd Cir. 2012). The stay was requested because the SEC and Citigroup wished to delay the trial date, which Judge Rakoff had not postponed in his ruling. The court also appointed John “Rusty” Wing as pro bono counsel to defend the district court’s ruling. Wing’s role was to persuade the Second Circuit that the judge was correct. The Second Circuit panel expressed skepticism over some of Judge Rakoff’s conclusions, but a different appellate panel, not bound by this preliminary decision, would hear the appeal on its merits. On June 4, 2014, the Second Circuit released its decision. It held that Judge Rakoff had abused his discretion in refusing to approve the proposed consent decree between the SEC and Citigroup. The Second Circuit reversed the decision of the lower court and remanded, altering the appropriate standard of review to preclude judicial evaluation of the “adequacy” of a consent decree.

Methods

This article first sets out the theoretical underpinnings of an analysis of white-collar crime. The second part briefly explores Judge Rakoff’s decision, expanding on the substantive points of our amicus curiae brief, which emphasized the importance of “the public interest.” Finally, we present our findings and observations about the interpretation of SEC v. Citigroup, particularly as it relates to state-corporate crime.

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State-corporate crime refers to crimes that result from the relationship between the policies of the state and the policies and practices of commercial corporations (Kramer and Michałowski 1990; Aulette and Michałowski 1993).

We will first make an observation on methods. As noted, we filed an amicus curiae brief before the US Court of Appeals, and were the only criminologists to do so. This approach constitutes participatory action research (Chevalier 2012; McIntyre 2008), since we immersed ourselves in the litigation. The authors also attended oral arguments before the US Court of Appeals and filed a successful motion to obtain a live stenographic transcript.

Theoretical and Historical Context: Failure of Securities Regulations

In the United States, corporate criminals exercise power in ways that traditional criminals do not, through their ability to influence the form, shape, and meaning of regulatory law. Historic interest has existed in the study of this form of “white­ collar” criminality (e.g., Michałowski and Kramer 2006; Sutherland 1940, 1949; Friedrichs 2011; Tombs and Whyte 2003). Critical criminologists have shown ongoing interest in examining modem forms of financial fraud, especially the recent recession-depression induced by the financial industry. Civil fraud charges against Citigroup are the latest example of financial criminality at the highest level of the private, corporate, and banking world.

American society has always been divided into groups characterized by highly unequal amounts of wealth. A ruling class exists, along with various lower-class strata, including middle and working classes, as well as those in and out of structural poverty (Domhoff 1967, 1970, 1990; Mills 1956). Bonger’s Criminality and Economic Conditions ( 1916), an early work devoted to a Marxist analysis of crime, adroitly emphasizes this point. This work observes that only those from the inferior proletarian class are likely to become officially recognized as criminals. The roots of crime, Bonger believes, are found in the exploitative and alienating conditions of capitalism. Permeating the legal system and enforcement mechanisms is the class-based nature of society. Bonger’s work was a precondition for Sutherland’s widely accepted treatise on the nature of white-collar crime.

Sutherland ( 1940,1949,1983) constructs a class-based definition of “white-collar crime” that focuses attention on the elite position of the perpetrators and sheds light on the illegal acts of businessmen, professionals, and politicians. C. Wright Mills uses the term “immorality” to describe the moral insensitivity characterizing this group of perpetrators (Mills and Horowitz 1963). Nearly all of Sutherland ’s corporate examples are civil and regulatory cases rather than criminal prosecutions, and he emphasizes that the powerful receive preferential treatment in the legal system. “Elites have great influence over the content and character of the law” (Simon 2012, 269). In Sutherland’s updated treatise ( 1983) on white-collar crime, the thesis is that persons from the upper socioeconomic class engage in much criminal behavior and

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that this behavior differs from that of the lower socioeconomic class, principally in the administrative procedures used to deal with the offenders.

Chambliss (1979), Chambliss and Seidman (1982), and Chambliss and Zatz (1993) use neo-Marxist concepts to provide a framework for understanding deviance in capitalist societies. According to Chambliss, those who hold power own and control the means of production; moreover, the social structure in a capitalist society reflects the relationship between the powerful and the relatively powerless: the ruling and subject classes. As part of this structure, the state and its agencies of social control generally reflect and serve elite interests. In this perspective, Chambliss holds that there is a “structural, ‘objective relation’between the state and capitalism which guarantees that the state, within the limits imposed by inherent contradictions and the class struggle, will operate in the long-term interests of the capitalist class, independent of direct participation of individual capitalists’* (Chambliss 1979; Calavita and Pontell 1994). However, in his modified theory of “structural contradictions,” there is room for individual initiative in the construction of law. Sometimes, elite interests do not prevail. Nevertheless, historically the law and definitions of deviance in general and in the long run have been subservient to the needs of corporate business (Simon 2012; Barnett 1981).

Quinney ( 1970) maintains that crime has a “social reality” rather than an objective reality. In other words, crimes are established by criminal law and various interests (elites and other powerful groups) formulate laws. Therefore, crime is created and one cause of criminal behavior is the creation and imposition of criminal law. This “social reality” of crime further develops the notion that the economic deviance perpetrated by Citigroup exists outside the realm of criminal law. Later, Quinney (2000) argues that issues of class and race construct and guide the criminal law. Many critical criminologists have advanced this notion, including Reiman and Leighton (2013). They point to economic and class bias when some harmful acts are labeled crimes while others are treated as regulatory matters. The difference is a function of capital and power in America.

Discussion of the theoretical context satisfies the need to place SEC v. Citigroup within the literature, but it is also instructive to link the broader notion that corporate criminal prosecution may seriously harm innocent shareholders, employers, and capitalism in general (see, e.g., Clinard and Yeager 1980). When working for the Clinton administration, former Attorney General Eric Holder published a memorandum that proposes a “collateral consequences doctrine” for the government to consider when deciding whether to file criminal charges against a corporation. The Holder memo offers a convenient argument to federal prosecutors when deciding not to prosecute illegal conduct on the part of large corporations. “In the corporate context,” Holder (1999) explains, “prosecutors may take into account the possible substantial consequences to a corporation’s officers, directors, employees, and shareholders, many of whom, depending on the size and nature of the corporation, have played no role in the criminal conduct” (see also Barnett 1981).

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This brief theoretical review provides an appropriate foundation for comprehending the current failure of securities regulation in the United States, and allows us to establish the sociopolitical context that frames the extensive criminogenic behaviors in the early part of the twenty-first century. As such, we can better understand the importance of SEC v. Citigroup.

Judge Rakoff’s Decision

Following the SEC ’s submission of the consent decree, the district court scheduled a hearing to determine “whether the proposed judgment is fair, reasonable, adequate, and in the public interest” (SEC v. Citigroup Global Markets, Inc. 2011,330). The SEC’s position was that the proposed consent decree provided the same type of relief it would have won had it pursued a trial against Citigroup. When questioned, the SEC estimated that investment losses exceeded $700 million. It also indicated that the proposed $285 million fine was based on the only remedies available under law: disgorgement of ill-gotten gains and a civil penalty that cannot exceed such gain (ibid., 329).

Judge Rakoff rejected the deal, characterizing it as “neither fair, nor reasonable, nor adequate, nor in the public interest” (ibid., 332). His concern was the boilerplate settlement language the SEC had used for nearly 40 years in which firms neither admit nor deny wrongdoing. This standard practice, he asserted, was “hallowed by history, but not by reason.” The public had a clear interest in knowing the truth of what happened. Moreover, the court could only decide whether a settlement was fair on the basis of admitted facts, which are lacking when there is no admission of wrongdoing.

Obvious advantages accrue to Wall Street corporations under federal investigation if they can settle fraud allegations without admitting guilt, such as minimizing future private class actions. The US Department of Housing and Urban Development, for example, settled for $202 million with Deutsche Bank after the bank admitted that it had lied about the eligibility of loans for federal mortgage insurance and repeatedly submitted certificates that were knowingly or recklessly false (Schwartz 2012).

Many details of what occurred remain unknown, but in suing Goldman Sachs in 2010, the SEC discovered, through internal institutional financial emails, that the “Abacus” CDO that Goldman marketed to investors was also created by a third party who proceeded to “short” the CDO (bet against its success) (Yeager 2012). Many believe the “mortgage mess” metastasized into a global financial crisis due to similar activity on the part of Fannie Mae, Freddie Mac, Bear Steams, Citigroup, Washington Mutual, AIG, and Lehman Brothers, among others (Jenkins, Jr. 2010).

Legal Issues: SEC v. Citigroup

The issues in the appeal included: (1) the role of the district court in reviewing proposed settlements submitted to the court by the SEC for approval, where the

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federal courts conduct the only review of such proposed settlements and where those settlements invoke the contempt power and authority of the federal courts; (2) the form, content, quality, and quantity of information a district court can require in evaluating a proposed settlement to support its determination of whether the settlement meets the applicable test for approval; (3) the impact of the breakdown in the adversary process when both parties join together to obtain court approval of their agreed-to settlement as quickly as possible; (4) the elements of the legal standard that a district court must apply when evaluating a proposed settlement submitted to the court by the SEC for approval; (5) the degree of deference the court owes to the agency seeking approval of a settlement; (6) the nature of the alleged misconduct by Citicorp Global Markets, Inc. (“Citigroup”), involving hundreds of millions of dollars of securities and derivatives; (7) the multiple consequences of the alleged misconduct by Citigroup, including the damages it caused investors and the revenues and other benefits it generated for Citigroup; and (8) whether the proposed settlement at issue in this case satisfies the applicable standard (see Kelleher, Hall, and Bradley 2012).

Four of the largest and highest-funded US business interest groups submitted amicus curiae briefs in support of the SEC and Citigroup. This included the Business Roundtable (an organization of chief executives), the Chamber of Commerce of the United States of America, the Securities Industry and Financial Markers Association, and the Pharmaceutical Research and Manufactures of America. Among the amici supporting Judge Rakoff were Better Markets (an independent nonprofit that promotes the public interest in the financial markets), Harvey Pitt (a former SEC head), Occupy Wall Street—Alternative Banking Group, and a collective group of 19 scholars at US law schools where research and teaching focus on federal securities enforcement and the SEC. An amicus curiae brief submitted by the current authors emphasized that this decision “may have a dramatic impact on the future of SEC civil fraud prosecutions in major white-collar crime matters, as well as the ability of the federal judiciary to exercise discretion to review the suitability of those agreements under the public interest doctrine” (Brief of Professors as Amicus Curiae in Support of District Court, January 30,2013). We were granted standing to file a brief, but denied standing to participate in oral argument. All these submissions supported Judge Rakoff’s decision to ask questions about the SEC’s performance in light of the financial crisis, i.e., “its practice of settling enforcement actions alleging serious fraud without any acknowledgement of facts, where an ‘obey the law’ injunction is sought, with only modest remedial measures and insubstantial fines” (Black 2012).

The Resulting Legal Battle

On appeal, the SEC argued that the courts have regularly approved injunctive consent judgments proposed by the SEC that are not based on proven or acknowledged facts.These judgments have imposed substantive injunctive and monetary relief. In

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fact, Judge Rakoff approved a consent judgment between the SEC and WorldCom, and later a $750 million penalty without forcing WorldCom to admit or deny fraud allegations in the complaint (SEC v. WorldCom 2002, 2003). He approved the consent judgment and stated that it was “not only fair and reasonable but as good an outcome as anyone could reasonably expect” (SEC v. WorldCom, 273 F. Supp. 2d at 436) and that it was “a model of what should be attempted in a case of this sort” (Schiesel and Romero 2002). Other district courts have also approved SEC consent judgments that contained “no admit/no deny” provisions (see, e.g., SEC n.AIG 2006).

The SEC and Citigroup also attacked the Rakoff decision, arguing that by disregarding the longstanding judicial practice, it interferes with the ability of regulatory agencies to “take care that laws be faithfully executed” (Board of Trade v. SEC 1989, quoting US Const. Art, II, section 3). The courts, they said, have historically been extremely deferential to the SEC’s determination of whether a settlement is in the public interest (see, e .g., FTC v. Standard Financial Management Corporation [1st Cir. 1987]; SEC v. Randolph [9th Cir. 1984], SEC v. WorldCom [S.D.N.Y. 2003]). Concern also existed that consent decree approval should not be predicated upon the facts, either by admission or trial—a “bright-line” rule.

John Wing, the appointed Pro Bono Counsel for the United States District Court, refuted the SEC and Citigroup’s claim that the Federal District Court erroneously acted by impeding the proposed consent decree. He argued that the court acted ap­ propriately by requiring attorneys for the SEC and Citigroup to present the court with a “factual or evidentiary basis upon which to exercise its independent judgment.”

Wing strongly argued that the SEC failed to present an evidentiary basis to support the proposed consent decree, which the SEC could have easily provided to the court. In a previous consent decree signed by Judge Rakoff concerning the SEC and Bank of America, an in-depth Statement of Facts had been provided. Although the SEC conducted a four-year investigation of Citigroup, Wing noted no tangible evidentiary facts were provided to the court to allow it to make an informed and responsible decision in the proposed consent decree. A year before, Wing said, the SEC had a similar case with Goldman Sachs, where the defendant had engaged in “virtually identical conduct.” As such, the SEC should have been able to provide the court with the requisite evidentiary basis for a consent decree.

During oral arguments, the three-judge panel was skeptical that neither the SEC nor Citigroup had put forth enough evidence to satisfy Judge Rakoff that the proposed settlement met the criteria for injunctive relief. As Circuit Judge Susan Carney observed:

To establish fairness,reasonableness and adequacy, surely you would need something more than allegations made in the complaint, particularly when there’s a complaint standing side by side, like the Stoker complaint that alleges intentional misrepresentation by a highly placed employee in the

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same organization. (Transcript of Argument in SEC v. Citigroup Global Markets, Inc. 2013, February 8, p. 6)

Was the district court not entitled to look at the Stoker complaint? On the same day that the SEC charged Citigroup, it also brought a parallel civil action against Brian Stoker, a Citigroup employee who was primarily responsible for the transaction documents in the acts in question. In an incriminating email sent to his supervisor, he stated that he hoped that the CDO transaction would go forward and described it as a “prop trade” (US Securities and Exchange Commission, October 19,2011). Neither the SEC nor Citigroup had a suitable explanation for this question, aside from citing the precedent granting the SEC wide discretion to enter into settlement negotiations with parties under investigation. Indeed,the SEC argued the settlement, including the financial reparations, “is, frankly, not something for the Court’s proper consideration” (Transcript, p. 9).

During further questioning, the SEC admitted that it rarely enforced the injunctive relief it sought in these settlements (Transcript, pp. 10-11 ). For defendant Citigroup, however, the pressing issue was very clear. Judge Rakoff wanted the bank to make admissions as to facts that would give defrauded investors “the benefit of collateral estoppel against Citigroup” (Transcript, p. 12). Citigroup preferred a consent agreement to a SEC civil fraud charge because, among other reasons, it could thereby avoid the downside of such an agreement as evidence in class action suits for massive tort claims. Quoting counsel for the bank:

Well, you can guess what happened next, your Honors. The plaintiff’s counsel in the parallel class action lawsuit then sought tens of billions of dollars of recovery from Bank of America based on Judge Rakoff’s finding of wrongdoing. Corporations will never be willing to go through the Bank of American process again because of the collateral estoppel risks. They would much prefer to go to trial because the risks of going to trial are no worse—and losing—are no worse than the risks of settling with collateral estoppel effects. (Transcript, p. 15)

In closing, the judges hinted at a way out of their dilemma: to remand the case back to Judge Rakoff for consideration of the evidence put forward against Citigroup employee Brian Stoker (Transcript, pp. 41,43). At the end of the hearing in February 2013, there was a colloquy between Circuit Judge Raymond Lothier and the counsel for Citigroup:

JUDGE LOHIER: Well, let me ask you another question. There are other regulatory agencies and components of the Department of Justice that now require admissions from defendants in civil fraud cases. Apparently, as I understand it, based on a statement by someone within the Department of Justice recently that hasn’t had any adverse consequences to the ability

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of the Department of Justice to enter into these consent decrees at least in the Southern District of New York.

So, you’re telling us that the world will fall apart if the district court here is allowed to do what it did in this case?

MR. KARP: Oh, I’m telling you that many corporations will... decide not to settle matters if a price of settlement is admitting liability or permitting a district judge to make a finding of liability in connection with a federal regulatory consent judgment, nor would this Court’s ruling be limited to the SEC. There are more than 20 federal regulatory agencies that currently permit no-admit settlements. And the federal regulatory enforcement regime would screech to a grinding halt if a majority of corporate defendants decided not to participate in settlements.... (Transcript, pp. 43-44)

In our amicus curiae brief, we argue that the criteria for a public interest test ought to be expansive and take into consideration a variety of factors. The criminological literature on state and corporate crime makes a persuasive argument that “social harm” ought to be included in any public interest litmus test (Sutherland 1949; Hillyard et al. 2004). Social harm can include factors that go beyond any specific dollar loss attached to a particular fraud. This includes a pattern of conduct that contributed to a major recession, a de facto depression in the US housing market, a loss of employment and homes by many middle and lower-class households, and a growing trend of inequality in America. Citigroup was not alone in deliberately constructing an equity investment instrument made up of subprime mortgages and other financial products that were likely to fail. This pattern of behavior was common among Wall Street financial corporations and contributed to depression­ like circumstances for many Americans. In this instance, the SEC did not protect those “common” citizens, their jobs, homes, or savings from the rapacious behavior of defendants like Citigroup.

Citigroup was a known recidivist, having been sanctioned for fraud before. Most recently, it agreed to pay $158.3 million dollars for submitting faulty loans to a federal mortgage insurance program (Kapner 2012). Even while this case was pending before the Second Circuit Court, Citigroup settled a civil fraud claim by Federal Home Loan Mortgage Corporation for the sum of $395 million (New York Times 2013).

For us, the definition of “public interest” should encompass cases in which banking entities are found guilty of civil fraud and must publicly admit to having committed fraud and are therefore liable to other litigants. The public interest can include other sanctions against major corporations, such as: (1) the use of fines to allow researchers the opportunity to study state-corporate crime and fraud; (2) the disclosure of the investigative reports upon which the SEC negotiated the proposed settlement, or intended to disclose at trial; (3) forcing a major bank like Citigroup

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to take out advertisements in major news outlets (paper and radio) apologizing for its fraudulent behavior, admitting guilt, and outlining steps to prevent reoccur­ rences; (4) putting one or more “citizen” representatives on the Citigroup Board of Directors as part of a new external surveillance; and (5) ordering a defendant like Citigroup to cooperate in an academic study of its fraudulent behavior, thereby facilitating interviews of bank employees and corporate officers.

Court of Appeals Decision

The US Court of Appeals for the Second Circuit reversed Judge Rakoff’s decision in the SEC v. Citigroup litigation in June 2014 and vacated his order that had rejected the Citigroup-SEC settlement on a number of grounds.(SEC v. Citigroup Global Markets, 752 F. 3d 285,2nd Cir. 2014). It took the panel almost 16 months to rule in a decision that largely ignored oral argument by the circuit justices themselves.

The SEC v. Citigroup decision reaffirms the cozy relationship between regulatory agencies and their corporate clients, a global banking concern in this case. The panel concluded that the SEC presented sufficient facts to justify the consent decree, that an admission of liability was not required, as even Judge Rakoff’s counsel had admitted. Moreover, a judge’s role is circumscribed simply to determine whether the proposed consent decree is “fair and reasonable” in terms of a four-point test: (1) the basic legality of the decree; (2) whether its terms are clear; (3) whether the decree resolves the claims in the original complaint; and (4) whether the decree might be tainted by improper collusion or corruption. For the Appellate Court, this test is basically procedural (Transcript, pp. 294-95). The “job of determining whether the proposed S.E.C. consent decree best serves the public interest, however, rests squarely with the S.E.C., and its decision merits significant deference” (Transcript, p. 296).

Conclusions

SEC v. Citigroup delineates the proper role of the federal district court when the SEC is seeking court approval of a proposed judgment that includes an injunction against the defendant’s future conduct. The case concerns the role, power, and authority of the state, as well as the proper institutional role of the federal judiciary. The federal courts are the only check on executive power in connection with settlements between regulatory agencies and the businesses they oversee. This case represents a breakdown of the adversary process involving the state and private litigants. It subverts enforcement of the law in financial markets and erodes pubic confidence and trust. The public has “deep suspicions that the authorities have given powerful people and institutions a pass during this awful episode” (Morgenson 2012, Bl). In any configuration of what constitutes the “public interest,” or even a district court’s right to reject a plea agreement, the public’s scepticism must be duly noted.

We examined this precedent-setting case because it illustrates the intersection of corporate and state crime. The bank and its regulatory agency, the SEC, jointly

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appealed an order to allow them to continue prosecuting white-collar crime in the civil fraud arena. They wish to continue to negotiate consent agreements with minimal financial penalties to Big Finance and Wall Street defendants. Major white-collar crime of this variety is effectively decriminalized for market elites. A structural analysis posits that the owners of capital (finance capital in this Citigroup case) receive preferential treatment due to the central role of finance capital in the functioning of the private capital system. If regulators harm the owners by crip­ pling institutions that are the source of their wealth and power, they in turn harm the system (see Barnett 1981; O’Connor 1979).

In our view, federal courts need the authority to obtain sufficient information and facts to determine whether a proposed settlement should be approved as fair and in the public interest. The reversal of Judge Rakoff’s order undermined the power, authority, and duty of the federal courts; as the judicial role is further limited, transparency, oversight, and accountability in financial markets will diminish, adversely affecting the public interest. The appellate court affirmed here that trial judges are not to consider the public interest in determining whether to accept the SEC’s negotiated settlement. That responsibility, the court held, rests solely with the regulatory agencies, absent evidence of corruption or collusion.

The Business Roundtable brief (2012,1) admitted that “virtually every large company... [has] been faced at one time or another with a government enforcement action and have had to choose whether to litigate or settle.” However, there is a greater incentive to settle now due to the appellate court’s decision, given the lower standard for consent decree approval. Of course, Wall Street is deeply involved in corporate malfeasance for which there could be severe criminal sanctions. Market elites are thus keenly interested in lobbying legislators to exclude them from prosecution; minimally, they hope to transfer the matter to the civil arena and then to negotiate consent decrees favorable to both parties. In Sutherland’s perspective, such civil settlements are crimes, since fines and damages are involved.

At the micro level, the SEC’s behavior in the Citigroup case (and others) can be explained in terms of theories of bureaucracy, with a regulator seeking the best outcome given limited resources (see, e.g., Weber 1947; Wilson, 1887). Settlement is deemed a favorable outcome if the payment is large, headlines are generated, and a trial is avoided, thereby minimizing the expenditure of agency resources. Similar models (see, e.g., Posner 1979) posit that a civil settlement is preferred to a criminal prosecution due to the high standard of proof in the latter, as well as the cost. Successful prosecution of executives could be the most effective deterrent, but criminal intent is difficult to prove. Agencies take the easy way out and corporations settle without denying or admitting guilt and write off the fine as a business expense.

If our theoretical analysis is correct, the issues in SEC v. Citigroup are structural to the marketplace, to the extent that they rely upon the legal accumulation of large amounts of private capital, thereby enhancing the political influence of corporations and banks (Marx and Engels 1986; Quinney 2000; Chambliss and Siedman 1982).

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Corporate elites on Wall Street thus lobbied the US House of Representatives to amend the 2010 Dodd-Frank Act, which imposed tighter regulatory procedures. Lobbyists for Citigroup helped to write one of the bills (Lipton and Protess 2013). Given the structural origins of this form of state-corporate crime, SEC v. Citigroup conforms to apattem in the financial sector of the marketplace, with history repeating itself (Foster and McChesney 2012; Harvey 2010; Jameson 2011; Barak 2012). Yet the case has a greater significance for the study of criminology. The sales of CDOs, prepared and distributed by Citigroup and others, played a major part in the 2008-2010 economic crisis, which imposed the most harm on the people of the United States since the Depression of the 1930s.

A structural remedy is needed in the state’s regulatory framework regarding “crimes in the suites.” The current system of enforcement borders on being massively ineffective, fraudulent, and complicit. Mortgage fraud does not rank among the FBI’s highest priorities and the Department of Justice cannot supply readily verifiable data on mortgage fraud cases, let alone effectively pursue them (see US Department of Justice 2014).

Two days before the Court of Appeals issued its decision, the SEC announced a change in policy whereby it would seek admissions of liability as part of settlements in appropriate cases. In 2013, the SEC prohibited civil defendants from using “no admit/no deny” provisions regarding fraud, if they had already pleaded guilty in a parallel criminal case. Thus, Judge Rakoff may have lost the battle, but he won the war. According to New York Times reporters, he “secured a victory of sorts, having set in motion a series of events that swayed public opinion and influenced the S.E.C.’s broader enforcement agenda” (Protess and Goldstein 2014). However, cosmetic policy shifts simply maintain the ongoing pro-corporate climate of the post-2008 financial crisis world.

On August 5,2014, District Court Judge Jed Rakoff (2014) signed the original consent decree between the SEC and Citigroup, but he did not go quietly. “As a result of the Court of Appeal’s decision,” he noted, “the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever.”

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“Putting Cruelty First”: Liberal Penal Reform and the Rise of the Carcerai State Jason Vick

Why are so many people in prison today? How do we make sense, more generally, of the fact that all the world’s liberal democracies rely on incarceration as an essential tool of punishment? Specifically, why is it that the discourses and practices surrounding punishment in today’s liberal democracies consider torture and other forms of physical abuse to be unacceptably cruel, while long-term incarceration is considered unproblematic? Vick approaches this problem through a consideration of the liberal reformism of Cesare Beccaria and Jeremy Bentham, which helped to pave the way for a transition from irregular, and usually corporal, punishment to the regular, systematic liberal justice system that eschews corporal punishment but relies heavily on incarceration. To develop this argument, the author engages with the literature that focuses on the role of cruelty within liberalism, in particular the work of Judith Shklar. By drawing on Shklar’s distinction between physical cruelty (which liberals abhor) and moral-psychological cruelty (about which liberals are ambivalent), the author is able to better illuminate how humane reformists such as Beccaria and Bentham could both oppose corporal punishment and favor incarceration as a satisfactory liberal solution to the issue of punishment that minimizes (physical) cruelty.

Keywords: Beccaria, Bentham, penal reform, liberalism, cruelty, incarceration, Shklar, Nietzsche

Sweetheart Settlements, the Financial Crisis, and Impunity: A Case Study of SEC v. Citigroup Global Markets, Inc.

William Calathes and Matthew G. Yeager

This article highlights the inherent limitations and current failures of securities laws, with a particular focus on the abdication of power by state agents to protect the public interest from financial frauds. Through a case study of SEC v. Citigroup Global Market, Inc., the authors examine the SEC’s practice of settling enforcement actions alleging serious patterns of fraud. Here, corporate and bank fraud is successfully moved away from the criminal courts to the civil fraud arena, and then takes the form of “consent decrees” in which the offending party can negotiate a penalty, usually in the form of a modest fine and no admission of liability. This finding is consistent with criminological literature dating back to Willem E. Bonger and Edward H. Sutherland, and, more recently, to the work of Richard Quinney, William Chambliss, and Jeffrey Reiman and Paul Leighton.

Keywords: critical criminology, state-corporate crime, securities fraud, elite power, Securities and Exchange Commission, participatory action research

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