SEC’s Mary Jo White Uses Bully Pulpit to Lob Grenades at Judge Rakoff

By Pam Martens: October 7, 2013

President Obama Nominates Mary Jo White for Chair of the Securities and Exchange Commission

Last Thursday, Mary Jo White, the Chair of the Securities and Exchange Commission since April, spoke at Fordham Law School on “The Importance of Independence” at the SEC. This is akin to Jamie Dimon speaking at the American Bankers Association on the importance of safety and soundness of insured deposits at the Nation’s banks.

The audience sensed an agenda: that White was trying to publicly humiliate Judge Jed Rakoff like a schoolboy getting lectured by the teacher in front of the class. Rakoff is the Judge who is challenging the SEC’s perpetual no-admit-or-deny settlements with Wall Street firms. The Wall Street Journal reported that White looked right at Rakoff who was sitting in the room during her lecture.

White came to the SEC from Debevoise and Plimpton, a key Wall Street law firm, where she represented some of Wall Street’s biggest names. Her husband, John W. White, is a partner at Cravath, Swaine & Moore LLP which represents the same Wall Street firms and more. Under SEC rules, the conflicts of interest of the spouse are also Mary Jo White’s conflicts.

In her talk at Fordham, White said: “When I urge the courts to defer to the SEC’s independence and expertise, I am really only making the point that separation of powers requires each of us to respect and stay in our respective lanes.”

“We recognize that, under the law,” said White, “a court can review a settlement.  But a court that reviews a settlement that a law enforcement agency like ours enters with a defendant has a more limited task.  It is unlike a court’s wide-ranging inquiry into the merits of a class-action settlement, for example. A court reviewing a consent judgment in one of our cases has a narrower focus – making sure that the settlement is not ambiguous and that it does not affirmatively harm third parties or impose an undue burden on the court’s own resources. But, the core decision as to whether to seek admissions is a decision for the Commission to make in its best, independent judgment of what should be required.”

And, possibly to reassure any of her former clients that might be in the audience, White added: “Indeed, as I have said, the SEC’s longstanding, no-admit-no-deny paradigm continues to be of enormous value because it provides swift remedies for misconduct and quick relief to investors without the risk of litigation.”   

Michael C. Macchiarola has written a research paper on Rakoff’s questioning of how the SEC’s no-admit settlements are potentially perverting the public interest. Macchiarola writes:

“The Judge’s rumblings uncover a practice ‘hallowed by history, but not by reason’ and his work sheds light on a curious corner of the Commission’s maneuvering too long unexamined and unquestioned out of deference, convenience, apathy, or some combination thereof. If sunlight indeed remains the best disinfectant, Judge Rakoff’s series of opinions offers the industry and its primary regulator a refreshing opportunity for introspection, as each embarks on a proper cleansing. There remains, however, a significant difference between a good wash and a whitewash. And, as Judge Rakoff notes, ‘in any case . . . that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.’ ”

Macchiarola found that there was “surprisingly scant literature and precedent that exist on the subject” and that “a more active role for courts is both necessary and responsible in cases where the Commission seeks judicial enforcement powers to assist in the monitoring of wrongdoers post-settlement.”

The Macchiarola research also found that Rakoff’s scrutiny of no-admit settlements by the SEC was spreading to other Judges. Macchiarola writes: 

“In March 2010, for example, Judge William Pauley, of the Southern District of New York, rejected a Commission proposal to amend the historic global settlement that brokerage firms agreed to following the much celebrated conflicts of interest inquiries in 2003. Labeling the proposed amendment ‘counterintuitive,’ Judge Pauley found it to be contrary to the public interest, despite the Commission’s endorsement. In August 2010, Judge Ellen S. Huvelle, of the D.C. Circuit, refused to ‘rubber-stamp’ the Commission’s proposed settlement with Citigroup over the bank’s failure to fully disclose its exposure to subprime mortgages during the recent financial crisis. Judge Huvelle raised significant questions about the proposed $75 million settlement and her concerns ‘mirrored Judge Rakoff’s.’ Judge Rakoff’s most recent kindred spirit seems to be Judge Rudolph T. Randa of the District Court of the Eastern District of Wisconsin. Upon being presented with a proposed settlement of fraud charges against Koss Corporation, a maker of stereo head-phones, the Judge cited Judge Rakoff’s Citigroup opinion and asked the Commission to provide a ‘written factual predicate for why it believes the court should find that the proposed final judgments are fair, reasonable, adequate and in the public interest.’ ”

Using the bully pulpit to promote sound public policy is an appropriate activity for the SEC Chair. Using it to lecture an independent Judiciary against stepping on the toes of the SEC is an abominable policy.

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