By Pam Martens: June 9, 2014

Last week, three Federal appellate judges with lifetime appointments, meaning they will be receiving salary and benefits for as long as they choose on the taxpayer’s dime and then a nice, fat, secure pension also courtesy of the taxpayer, ruled that the very same public that makes their own existence so cushy is not entitled to truth or facts or justice when it comes to Wall Street. Truth, facts, justice are quaint relics of a bygone American past. Today, when it comes to Wall Street, Federal judges are simply there to rubber stamp the settlements of captured regulators and then quickly re-ink the stamp for the next shady settlement.

To fully grasp what happened last week you will first need to purge your mind of everything you think you know about Federal District Court Judge, Jed Rakoff, rejecting a smelly deal fashioned between the Securities and Exchange Commission and Citigroup and getting slapped down by an impartial appeals court for doing so. Other than the fact that Rakoff did reject the deal, you’ve likely been misled on all other facets of the matter.

That’s the world we live in today: corporate-owned media and corporate-owned political appointments are producing corporate-owned reality.

For starters in the SEC v Citigroup case, Rakoff was not a lone voice in the wilderness calling out the SEC for sweetheart pacts with Wall Street that didn’t pass the smell test. Not only did 20 securities law experts around the country file amicus briefs arriving at the same conclusion as Rakoff in the matter (more on that shortly) but more than a year before Rakoff rejected the SEC v Citigroup settlement, Judge Ellen Segal Huvelle on August 16, 2010  in the U.S. District Court in Washington, D.C. rejected another SEC v Citigroup settlement deal that had the stench of cronyism all over it – and still does to this day.

The Huvelle case involved the SEC letting Citigroup off the hook for $75 million in settlement fines for falsely telling the public and shareholders it had $13 billion in subprime debt when it actually had over $50 billion. And instead of charging senior executives with securities fraud for lying about the bank’s financial condition, the SEC dropped its fraud charges and let two Citi executives off the hook with $100,000 and $80,000 fines, respectively.

Huvelle was highly critical of the terms of the settlement but approved it a month later after the SEC tweaked the terms to attempt to show it would hold Citigroup accountable for any further lawbreaking. But when Huvelle approved the settlement in 2010, she was not aware that there was a whistleblower inside the SEC who, five months later, was going to turn to Senator Chuck Grassley with written claims that this SEC settlement had been procured through untoward cronyism between Citigroup’s lawyers and the head of enforcement at the SEC at the time, Robert Khuzami.

According to the SEC’s Office of Inspector General which investigated the whistleblower’s claims against Khuzami, this is what transpired: On June 28, 2010, Khuzami spoke on the phone with Mark Pomerantz, a partner at Paul, Weiss, Rifkind, Wharton & Garrison, the law firm representing Citigroup. Pomerantz and Khuzami knew each other from their work at the U.S. Attorney’s office in the Southern District of New York. SEC attorneys working under Khuzami had already decided to bring fraud claims against Citigroup’s CFO, Gary Crittenden, for misstating the amount of Citigroup’s exposure to subprime debt by almost $40 billion.

On the call, Pomerantz told Khuzami that Citigroup would experience collateral damage if a key executive were charged with fraud. Shortly after this call, another Citigroup lawyer, Lawrence Pedowitz of Wachtell, Lipton, Rosen & Katz (the law firm that helped former Citigroup CEO Sandy Weill maneuver the repeal of the Glass-Steagall Act) told SEC Associate Enforcement Director, Scott Friestad, that Khuzami had agreed to drop the fraud charges against Crittenden. The Inspector General’s report says that Khuzami denies ever making this promise.

But the fraud charges were dropped and the deeply redacted Inspector General’s report does not inform the public as to how they came to be dropped. The report essentially whitewashes the claims against Khuzami, ensuring that fewer and fewer whistleblowers within or outside the SEC will go to the trouble of reporting wrongdoing.

The SEC’s Inspector General’s report is dated September 27, 2011 but it was not released to the public until November 17, 2011 – at which time it was obvious that someone had demanded confidential treatment for large swaths of the report, at times making the language unintelligible. One gets the feeling that the delay was caused by those same Citigroup lawyers who seem to have their way at the SEC and took a machete to the findings.

There was further evidence residing inside the SEC that Citigroup’s CFO, Gary Crittenden, should have been charged with fraud. On October 23, 2007, the SEC’s Kevin Vaughn sent a letter to Citigroup, writing as follows:

“We note your response to our prior comment 2 in our letter dated July 3, 2007 in which you state that you did not disclose the amount of mortgage backed securities and residual interests collateralized by non-prime mortgages held by U.S. Consumer due to immateriality. From your disclosures in your Forms 8-K filed on October 15, 2007 and October 1, 2007, it appears that you do have a material exposure to non-prime instruments as these instruments caused you to record a $1.56 billion loss in the third quarter.  Please revise to disclose the specific amount of your exposure to these types of instruments.  Please separately quantify the amount of exposure related to loans held for investment, loans held for sale, investments held as a result of securitizations, and any other types of instruments you may hold for each segment in which you have exposure.  Quantify the amount of non-prime loans you hold in your loan warehousing facility at each period end.”

Citigroup did not respond to that SEC demand for further information until December 14, 2007 and then, at that time, asked the SEC to protect its responses from the prying eyes of reporters or members of the public who might file a Freedom of Information Act Request (FOIA). Pages 22 through 32 of this correspondence have been completely redacted with the notation “The following information has been redacted in accordance with Citigroup’s request for confidential treatment,” with no explanation at all as to why the SEC is still cowering to the secrecy demands of this serial miscreant.

It is now more than six years later and the redactions remain on the SEC’s web site, further denying the public the truth about a global banking behemoth that was shored up with $45 billion in taxpayer equity infusions, over $300 billion in asset guarantees and $2.5 trillion (yes, trillion) in below-market rate loans to prevent an insolvent bank from causing alleged “collateral damage.”

On November 28, 2011, six business days after the news broke of the SEC’s Inspector General report revealing charges of cronyism between the SEC’s Director of Enforcement and Citigroup lawyers, Judge Jed Rakoff rejected the SEC’s $285 million settlement with Citigroup over charges similar to the Goldman Sach’s Abacus deal – except Citigroup had created a toxic debt instrument designed to fail and then shorted it itself, unlike Goldman which designed Abacus to fail but let a hedge fund do the shorting.

The SEC alleged in its complaint that Citigroup had falsely represented to its investors that an independent investment adviser had rigorously selected the assets.  But knowing that the toxic debt would deteriorate further, Citigroup took short positions in some of the same assets, seeking to profit from their continued decline in value. Citigroup allegedly realized $160 million in “net” profits, while investors allegedly lost over $700 million. And, yet, all the SEC was seeking from Citigroup was disgorgement of $160 million in profits, $30 million in prejudgment interest, and a $95 million civil penalty along with the requirement that Citigroup would undertake certain compliance measures for three years.

Rakoff, who repeatedly and unsuccessfully attempted to wring from the SEC the evidentiary basis for this weak settlement, wrote in his decision to reject the deal:

“Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are.”

The SEC and Citigroup separately appealed Rakoff’s decision to the Second Circuit Court of Appeals. One of the Judges assigned to sit on the appeal was none other than Raymond Lohier who had (wait for it) been the Deputy Chief and then Chief of the Securities and Commodities Fraud Task Force at the U.S. Attorney’s office in the Southern District of New York during the height of the financial collapse in 2008, 2009 and early 2010 when, amazingly, on March 10, 2010 President Obama nominated Lohier to become a Federal Appellate Judge, skipping that nuisance detail of first serving as a District Court Judge. Equally amazing, Lohier was quickly confirmed by the U.S. Senate.

Lohier was the man in charge when the trail and evidence was still hot against the largest Wall Street banks for engaging in fraud and causing the greatest economic collapse since the Great Depression. Lohier did not bring one criminal case against any one of those banks’ executives. Now, he is sitting as Judge over the fairness of wrist slaps as a suitable alternative to the criminal cases he failed to bring.

In his Senate confirmation hearing, it was noted that Lohier prosecuted the case against Bernard Madoff. It was not noted that Madoff turned himself in and confessed to the crime, after the SEC had for decades ignored evidence that Madoff was running the largest Ponzi scheme in history.

Nineteen securities law scholars filed a joint amicus brief with the Second Circuit Appeals Court explaining why Rakoff was correct to reject the Citigroup settlement. Harvey Pitt, the former General Counsel and later Chairman of the SEC, filed a separate amicus brief agreeing with Rakoff.

The nineteen securities law professors were from universities that included Duke, George Washington, Columbia, Villanova, Cornell and others. They told the court that:

“…the events of the last few years bear a striking resemblance to the events that led to the enactment of the federal securities laws eighty years ago. Those laws were enacted because Congress recognized that investor confidence is essential to strong and efficient capital markets.  In particular, Congress recognized the need to reform the securities sales practices of investment bankers that led to the 1929 Crash. Similarly, the turmoil of the current financial crisis has had a detrimental impact on investor confidence that needs to be restored.”

The securities scholars also informed the appeals court that:

“…the SEC’s complaint, if true, means that Citigroup engaged in serious and intentional fraud in disregard of the interests of its customers and for its own substantial gain. Yet, although the first sentence of paragraph one of the complaint labels this a ‘securities fraud action,’ the complaint charges Citigroup only with negligence…the prophylactic measures imposed for three years are relatively inexpensive measures that appear to be ‘window-dressing’…the penalties are modest, given the gravity of allegations, the investors’ losses, the harm to the public and the fact that Citigroup is a recidivist.”

The securities scholars concluded that, despite all of this, “The SEC and Citigroup essentially argue that district court should play no meaningful role in reviewing consent judgments and that the court must give total deference to the desire of the parties to compromise, without taking into account the public interest. This is not the law, nor should it be.  This court should affirm the district court’s order denying entry of the parties’ proposed consent decree…”

Harvey Pitt, who joined the SEC in 1968, served as its General Counsel from 1975 to 1978 and its Chairman from 2001 to 2003, told the Court that:

“The invocation of this Court’s jurisdiction, however, poses a danger that, in arguing the district court abused its discretion, the SEC effectively contends the district court had no discretion to withhold approval of the settlement. Since there is no basis for that proposition, the danger is that courts, in response, may recalibrate the ‘nice adjustment and reconciliation between the public interest and private needs.’  Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944).  That is a danger this Court should avoid…”

Lohier dominated the oral arguments in the case but when the final decision came out it showed that a different Judge wrote the decision: Rosemary S. Pooler. That’s likely because Lohier wanted to weigh in with a stricter interpretation in a concurring opinion.

The Court found that Rakoff had abused his discretion in not showing adequate deference to the SEC and by his ordering the case to go to trial. The Court wrote:

“Trials are primarily about the truth.  Consent decrees are primarily about pragmatism.”

The Court, however, returned the case to Rakoff for continued deliberation. Lohier went further in his concurring opinion, writing:

“I would be inclined to reverse on the factual record before us and direct the District Court to enter the consent decree. It does not appear that any additional facts are needed to determine that the proposed decreee is fair and reasonable and does not disserve the public interest.”

This whole affair sends the message to the public that we are looking at far more than generalized regulatory capture. It seems we are, specifically, looking at Citigroup’s lawyers capturing both the SEC and the Court that previously functioned as a check and balance over crony capitalism running amok in Manhattan.