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Citi Ruling Could Chill SEC, Street Legal Pacts

Publication Date: 
November 29, 2011
The Wall Street Journal
Jean Eaglesham and Chad Bray

Professor Joe Grundfest spoke with Jean Eaglesham and Chad Bray of The Wall Street Journal on how a recent ruling by a Judge who rejected a $285 million deal by Citigroup to settle civil charges because there was no admission of wrongdoing could have serious consequences if other courts adopted the same approach.

A decades-old blueprint used by many federal agencies to settle charges of wrongdoing with companies and avoid court was challenged by a U.S. judge, in a ruling that legal experts said could have a significant impact on future law-enforcement efforts against Wall Street firms.

In a sharply worded order, U.S. District Judge Jed S. Rakoff rejected a $285 million deal by Citigroup Inc. to settle civil fraud charges filed by the Securities and Exchange Commission as "neither fair, nor reasonable, nor adequate, nor in the public interest."


Joseph Grundfest, a law professor at Stanford University, said there could be serious consequences if other courts adopted the same approach as Judge Rakoff by refusing to endorse a settlement unless the firm admitted wrongdoing—something "no rational defendant" would do.

"Judge Rakoff's decision will likely be troubling to the entire federal government, and not just the SEC," said Mr. Grundfest, who from 1985 to 1990 was a commissioner at the agency. "By his logic, it's hard ever to support any settlement without a trial. So, will the federal courts be jammed with trials so that judges can know the 'truth' because they are unwilling to accept allegations negotiated in the shadow of a trial?"