I have written on a few occasions now about my concerns with the effectiveness of the regulatory approach of the SEC through settlements.
The recently reported proposal of the SEC to settle the case against the two Bear Stearn’s managers highlights how the US judiciary is starting to question its “rubber stamping” role in SEC settlement proceedings.
Reuters have helpfully given access to the transcript of the proceedings before the United States Senior District Judge Frederic Block who asked that the settlement approval process be discussed in open court.
The judge questioned the basis of settlement to which the SEC responded by saying that they were not in a position to award damages. The judge observed “ You had some tough adversaries. They brought you down to your knees, apparently”. The two managers had earlier been acquitted of the criminal charges made against them.
In the proposed Citi settlement Judge Rakoff had questioned the basis on which settlement had been reached.
Senior District Judge Block had earlier asked “[But once again,] am I just a rubber stamp here or is there some inquiry I ought to be making about these provisions? About the fairness of it? Or the reasonableness of it? I’m not so sure I necessarily agree with everything Judge Rakoff wrote, but what should be the Judge’s role when the Judge is being asked to consent to one of these types of things?”
The lawyers representing each of the parties have been asked in this case to prepare letter memoranda for submission to the judge by 21 February in which each party has been asked to consider Judge Rakoff’s standards.
If this trend continues then there is hope that regulatory actions may come with sharper teeth and financial institutions will need to do more than simply consider a regulatory fine as being no more than a cost of doing business.
Effective regulation may require the current SEC approach to settlements to be derailed.
©Jaitly LLP