ON OCTOBER 19, 2011, THE SEC announced with a flourish that it had reached a $285 million settlement with Citigroup over charges that the bank misled investors about a mortgage investment.1 Citigroup had created the instrument, called Class V Funding III, in early 2007 and filled it with bad assets that the bank wanted off its books as the housing bubble burst. Then the bank sold them to unwitting investors. The bank lulled investors into a false sense of confidence by assuring them the deal would be handled by a supposedly independent firm, similar to ACA in the Abacus case. In truth, Citigroup had foisted the rotten assets onto the firm, which went along with it because it received a fee. Citigroup made $160 million on the deal. Investors lost hundreds of millions.
The Citigroup agreement was the SEC’s third settlement with banks over bad behavior in the market for collateralized debt obligations. The SEC had settled with Goldman over Abacus and JPMorgan over another deal. It brought no other cases against either but merely scolded the banks and moved on, searching for one bad deal at other major firms. Now the agency had come to Citigroup for its own one-and-done settlement. Brad Karp, the chairman of Paul, Weiss, whose firm had been brought in on the Bank of America case in front of Judge Jed Rakoff, represented Citigroup.
As he negotiated for Citigroup, the Paul, Weiss team studied the previous SEC settlements. When Goldman settled the Abacus charges, the investment bank made a show of contrition by issuing a statement of apology and paying up beaucoup bucks—at least from the investment bank’s perspective. JPMorgan Chase had gone second and paid a penalty of $133 million ($154 million total, including disgorgement). That was the number for Citigroup to beat. In addition, JPMorgan settled only under a charge of negligence. Citi, too, wanted to avoid a stronger charge. Every detail mattered in a settlement. Even though the bank wouldn’t be admitting wrongdoing, what it wasn’t admitting was important.
Born in 1959, Karp has boyish features and knowing eyes. He speaks softly and so genially that people couldn’t help but feel as if he enjoyed their company. Since he was so frank (or expert in giving the appearance of frankness), they couldn’t help but enjoy his. His outward manner served his fierce negotiating skill. When Karp met with the SEC, he defended his client deftly. Citi was hardly a master criminal, he insisted; in fact, it was the biggest victim of the CDO business by far, having lost $30 billion on the investments. Citigroup was the schmuck at the poker table.
Despite occasional tough SEC talk, Karp and Paul, Weiss got what they wanted. Citi agreed to pay a $95 million penalty (on top of $160 million in disgorged profits), less than JPMorgan. The bank scored a negligence charge, a lesser charge than Goldman’s. Citigroup, of course, did not admit any wrongdoing; that was beyond habit at the agency. It almost had morphed into religious ritual. The SEC also charged a low-level banker and none of his superiors, just as it had done in the Abacus case with Fabrice Tourre.
Now, as with every one of this type of settlement in the Southern District, the case had to be assigned randomly to a judge. The day it happened, a colleague came into Karp’s office at Paul, Weiss and said, “You are never going to believe this.” Who should have gotten the Citigroup case but Judge Jed Rakoff. Karp understood the implications. Rakoff was not going to be happy with the settlement at all. And Rakoff fever was spreading on the bench. In 2010 Citi had been “Rakoffed” by a federal judge in the DC circuit over an SEC settlement. Now it looked as though it would get Rakoffed by the original article. Karp did not want to see all of his good work for his client undone. He began planning for the worst.
Jed Rakoff may not have had the inside view that James Kidney had of the SEC, but from the outside, the situation reeked. Three years after the financial crisis, no top executives had been charged with any crimes. The SEC had barely brought any actions and mainly charged low-level, tangential miscreants. Rakoff’s first salvo, against the Bank of America settlement, created the beginnings of a movement. But since the parties had revised the terms so quickly, it had stalled. The judge was not done. He could take another shot at the intellectual bankruptcy of the no-admit, no-deny settlements.
As soon as they learned Rakoff had been assigned the case, Paul, Weiss lawyers called the SEC. When they were negotiating the settlement, the agency and the bank had been adversaries. Now they were allies, determined to defend their agreement in united fashion against the judge. When Rakoff put questions to both parties about the settlement, they both worked up responses. The two teams talked on the phone about how to answer.
Rakoff moved his docket with alacrity. The next month, on November 9, 2011, the judge held a public hearing with the SEC and Karp. With the press scrum and associates from law firms all over the city filling his courtroom, Rakoff, obviously pleased, couldn’t help but begin the hearing coyly: “I’m reminded of Humphrey Bogart’s famous comment in Casablanca: ‘Of all the joints in the world, you chose to come here.’ But I’m delighted to have you all.”
Rakoff made it clear how unhappy he was with the weak settlement. The SEC’s knocking knees could be heard from the press release. He dove right into questioning an SEC lawyer, Matthew Martens. A former clerk for then Supreme Court chief justice William Rehnquist, Martens had been put in a difficult, almost ludicrous position. Rakoff discussed the four criteria on which he was supposed to judge settlements: the settlements must be fair, reasonable, adequate, and in the public interest. Now, the SEC, in its responses, seemed to argue that settlements did not, as a matter of law, have to be “in the public interest.” Martens had to defend this line of argument.
Rakoff raised another case the SEC had brought in front of him. In that matter, the SEC itself contended its settlements were—and were required to be—in the public interest. Which was it? Martens gamely explained that his own agency had been incorrect earlier.
“So are you saying that if I found that a settlement was—giving due deference to the SEC—fair, reasonable, and adequate, but, still looking at the equities, did not serve the public interest or even disserved the public interest, that I would be compelled” to okay it? Rakoff asked.
While of course the agency believed that all of its settlements were in the public interest, Martens said, he went on to explain that the judge did not get to decide: “I do not respectfully believe that’s part of the analysis.” Fair, reasonable, and adequate were it.
“It’s an interesting position,” Rakoff mused. “I’m supposed to exercise my power but not my judgment.”
The judge continued, complaining about the no-admit, no-deny language. How was one supposed to interpret whether the allegations were true or not? “You make very serious assertions,” he said. “Your own complaint labels them securities fraud. And yet your adversary is not in any legally formal way admitting those. They remain unproven in a court of law.”
Martens countered: “Citi has agreed to pay a substantial sum of money in response to our allegations. And they have not denied the allegations. We don’t believe in that instance that the public is left wondering what occurred in this case.”
“Let’s find out,” said Rakoff. “Let me ask Mr. Karp. Do you admit the allegations?”
Karp stood up and stepped forward. “We do not admit the allegations, Your Honor,” Karp said in a low, even voice. He went to sit back down, paused, and then added: “But if it’s any consolation, we do not deny them,” he added. The courtroom tittered.
“I understand that. And I won’t get cute and ask you what percentage of Citigroup’s net worth is $95 million because I don’t have a microscope with me.”
When Rakoff probed about the consequences to Citigroup from this settlement, Karp explained they were minimal. Citigroup could deny the charges where it mattered—in court—if it had to defend itself in any private litigation based on the transaction or similar ones. The bank could present the facts as it saw them, not as the SEC claimed. The SEC settlement, Rakoff was pointing out, was toothless.
Karp parried the notion that the settlement was without consequence, but Rakoff was skeptical. When Karp listed off the reforms the bank had agreed to—that Citigroup had new management and had overhauled its practices, its compliance structures, and its oversight—the judge couldn’t help but snap, “I’m glad to know that Citigroup had such a remarkable change. And I’m sure the economy might have benefited from it having come sooner.”
Then Rakoff moved on to skewering the SEC about the flimsiness of the negligence charge. He noted that the agency, in the separate action against the low-level Citigroup banker whom it charged in conjunction with the bank settlement, used language indicating that Citigroup undertook its actions knowingly and intentionally.
“Your complaint says that Citigroup marketed the securities being picked by Credit Suisse as having various attributes; but, in fact, there was a portion of real dogs that were picked by Citigroup, and Citigroup had turned around as soon as they had completed the sale or as soon as the offering had begun and started dumping those dogs on the investors.” The judge had given a near summary. “So how can that be negligence?”
Martens gave an answer encapsulating the central weakness with its investigations. It couldn’t figure out how to identify wrongdoing by high-level executives. “The problem, Your Honor, is identifying an individual who both had the relevant information and who was involved in the disclosure process.” The Citigroup employee, a low-level banker named Brian Stoker, was the only one who both had full knowledge of the deal and was in a position to object to the disclosures, but didn’t, the agency’s lawyer contended. No other Citigroup employee, according to the SEC, had the same view.
During the hearing, Rakoff made it clear that he hadn’t missed the effects of Karp’s advocacy on behalf of his client. The SEC’s complaint contained allegations that were tougher than those it made against Goldman in the Abacus transaction. Yet the agency entered into a softer settlement. What did the SEC and the public achieve from this settlement besides a “quick headline”? Rakoff wondered. Not much. The fine was “pocket change.” He pointed out that Citigroup was a recidivist, noting the SEC did little to punish repeat offenders.
The SEC and Karp came out of the hearing convinced that Rakoff would reject the settlement. They assumed the judge would ask them for more facts about how they reached the agreement. Karp resolved to resist, having learned from past experience. He wasn’t going to have Citi furnish more facts. Bank of America had been burned when Rakoff put facts in his opinion, because the plaintiff’s lawyers used them in their class action suit, winning an enormous $2.4 billion settlement.2 Citigroup couldn’t afford a similarly disastrous judicial finding as had befallen Bank of America. The potential exposure Citi faced was much worse, perhaps on the order of tens of billions.
Citigroup now needed to make an ally of its ostensible overseer, the SEC. Paul, Weiss had a series of conversations with agency officials, including the head of enforcement, Rob Khuzami; his deputy, Lorin Reisner; and a few others. Rakoff had set a trial date for the two parties. The bank did not want to give any admissions.
The SEC assured Citigroup’s lawyers it would not cave to Rakoff. (After a stint at the Justice Department, Lorin Reisner joined Paul, Weiss.)
Rakoff didn’t take the intermediate step to request more information. He felt the two parties were blowing him off. He decided to skip right over it.
The ruling came easily to Rakoff. He’d been thinking about the issues for a couple of years now. He did most of his thinking and writing on the weekends and at night, but this draft took only an afternoon. Good judges keep the societal context out of their rulings, focused on the narrow legal issue before them. Rakoff tried to put the crisis and recession out of his mind. He had read an infuriating New York Times story pointing out how many times Citigroup was a repeat offender. He concluded he could not grant his okay when he was not presented enough evidence.
His younger, verbose days were long past. Rakoff now kept his rulings short. This one came to fifteen pages, pithy even by his standards. He ran it by his clerks to check the citations. After a quick second look the next day, November 28, he issued the ruling.
Rakoff could not approve the settlement “because the court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment.” He explained: “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous.
“When a public agency asks a court to become its partner in enforcement,” Rakoff wrote, “the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.”
He then exposed the central problem with the settlements: they undermined any notion that justice had been served. The regulator could claim victory, but the corporation could just as easily claim it was making a nuisance payment to make the government go away. A settlement “that does not involve any admissions and that results in only very modest penalties is just as frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies.”
As much as Judge Rakoff claimed to have put the financial crisis out of his mind when coming to his decision, it clearly informed his pen. “In any case like this 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,” he wrote.
Rakoff arrived at a view of the problem with corporate law enforcement. The government did not hold companies and executives accountable. The settlement culture had corroded the Department of Justice and the SEC. As Rakoff says, “When you can settle cases so easily, you lose your edge. You lose your ability to go after the really tough cases and to penetrate the really sophisticated frauds because you haven’t been put to the test” of a public trial.
The public went wild, or as wild as it can get over a judicial opinion. The press profiled Rakoff. Letters of support poured in, more than in the Bank of America case and more than in his death penalty case. Rakoff viewed the centerpiece of his argument as a request for facts. He was not calling for an abolishment of the SEC’s mode of settlement. The press, however, focused on the settlements.
Citi and Paul, Weiss were now worried. Rakoff set a trial date for July 2012. Hoping to avoid an ugly public airing of the entire case, which would be a PR problem even if Citi prevailed, the law firm appealed. It needed the appellate court to act fast. They needed to figure out the right legal argument to get the circuit’s attention, and get the appeals court to stay the decision. Routine defendants, even those with legitimate constitutional issues to put before an appeals court, can wait years for responses. If it had merely desired to lay down a legal principle, the appeals court could have just as easily waited for the trial and then made a ruling later. But one of the most prominent law firms in the country working for one of the largest and most powerful corporations in the world managed to generate fast results from the court.
On March 15, 2012, a Second Circuit Court of Appeals panel stayed Rakoff’s decision, delaying the trial. The panel laid into Rakoff’s reasoning, dismissing it. “The scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal,” the panel wrote.3
Rakoff’s critics read into the fairly standard legalese of the ruling a tone of harsh personal rebuke. Rakoff felt it, too. He professed to not taking things personally but couldn’t help feel a little twinge. “I was bothered by the tone,” he says. The judge who authored it “obviously decided I was a dumbbell and wrote the opinion accordingly. That hurt.”
Being overruled generates complex feelings. “If you’re never reversed on appeal,” Rakoff told a reporter, “you probably have taken too narrow a view of the law.”4 Once judges worry about reversals, Rakoff felt, they were lost. They no longer were trying to do what they thought was right. “The glory of the penal court is independence,” he says.
He may have respected the court system, but it didn’t mean he couldn’t poke fun. Back in 2001, Rakoff wrote “The Court of Appeals” for the Courthouse Follies, to the Irving Berlin tune “A Couple of Swells” from the movie Easter Parade. His stage direction was for three hobos to enter and go through a garbage can, bring out black robes, and put them on. Then they began to sing:
We’re the Court of Appeals.
We’re very, very big deals.
We’re not the sort
On District Court,
To us, they are just schlemiels.
Circuit judges are we.
We work
We do?
From ten to two,
At least every week in three.
Those district judges leave things such a mess.
Thank God it’s we who get to second guess.
Second guess.
We would vote for affirming ’em,
But their thinking’s rather light.
We would vote for affirming ’em,
But it just would not be right.
We would vote for affirming ’em,
But it wouldn’t be much fun.
So, we’ll keep on reversing ’em,
Yes, we’ll keep on reversing ’em,
Oh, we’ll keep on reversing ’em
Till they’re done.
Now again, Rakoff took solace in doggerel. Though he hadn’t lost his sense of humor, others were not so amiable. After his Citigroup ruling, with another Southern District reunion coming up, Rakoff proposed to Rob Khuzami, his longtime friend who was now the head of enforcement at the SEC, that they sing a song together. He had written lyrics based on the Irving Berlin tune “Anything You Can Do,” from the musical Annie Get Your Gun. In the original, Annie Oakley says to marksman Frank Butler, “Can you bake a pie?”
Frank Butler says, “No,” and then she says, “Neither can I.”
Rakoff’s version was, “Can you bake a pie? Don’t admit or deny.” Khuzami was game initially. But in vetting the proposal, the drudges in the government vetoed his participation.
Rakoff did build a bridge with Brad Karp. One day a call came in to Karp’s office. Rakoff was on the line. The judge said, “I know I’ve been ruling against you, but you are an excellent lawyer.” They talked amiably, and then Karp suggested dinner.
Rakoff loved to collect younger lawyers as friends and contemporaries. Karp, sixteen years younger, and Rakoff began having dinner every several months, often with their wives and other lawyers, at restaurants around Manhattan: Il Gattopardo, the Leopard, Telepan. Karp would join Rakoff and another federal judge, Denise Cote, as guest lecturer at a class up at Columbia Law School taught by Rakoff’s close friend, the prominent securities law professor Jack Coffee. Karp even sent a snow globe with a caricature of Rakoff to the judge, which he placed on his crowded desk.
Given the sharp tone of the court’s stay, Citigroup and Paul, Weiss figured they were in the clear. The actual appeal, they assumed, would be anticlimactic. They were right. Though the parties had to wait years and received a little scare during a subsequent argument in front of the Second Circuit, on June 4, 2014, the appeals court reversed Rakoff.
To some extent, Judge Rakoff had boxed himself in. A logical conclusion of his opinion was that the government should or could never settle cases without getting admissions of wrongdoing first. While agencies had become addicted to settlements without admissions, settlements serve a purpose. But the appeals panel did not make this point. Instead, it sought to ratify that a judge was, indeed, nothing much more than a rubber stamp. The district court had “abused” its “discretion by applying an incorrect legal standard.”
“The primary focus of the inquiry,” the court wrote, “should be on ensuring the consent decree is procedurally proper.”
Rakoff didn’t agree. “Boy, is that nonsense!” he says. The standard includes the words fair and reasonable. “Is ‘fair’ about procedure only? Is ‘reasonableness’ about procedure at all?” he says. “They took all the lifeblood out of the standard. I went further in one direction. They went further in the other direction.”
On August 5 he grudgingly approved the settlement. The appeals court “has now fixed the menu, leaving this court with nothing but sour grapes,” he wrote.5
The Citigroup ruling was of a piece with how the courts have been ruling on securities enforcement for years. The business of law had changed. The incentive structure of the prosecutors at the Department of Justice had changed. And the judiciary had changed as well. The Supreme Court turned more sympathetic to business and more skeptical of government regulation and enforcement. The shift began in the 1970s, during the Warren Burger court, but accelerated in the court of John Roberts, who became chief justice in 2005.
The Roberts court is the most business friendly since World War II, according to a study looking at about two thousand decisions from 1946 to 2011.6 The 2010 Citizens United v. Federal Elections Commission case, in which the court ruled that corporations were allowed to spend unlimited amounts in elections, is perhaps the best known of the group of rulings that widened corporate rights and protections. But the high court has also moved to protect corporations from class actions and human rights lawsuits; increasingly granted summary judgment, where the court decides quickly, without a full trial, in favor of corporations; and ratcheted up the scientific standards upon which claims against businesses can be made. Over a series of rulings, the Supreme Court has allowed companies to put clauses in their contracts to force customers into arbitration, a forum that favors large companies, rather than the court system. In Wal-Mart Stores, Inc. v. Dukes et al., in 2011, the high court raised the bar on discrimination class action suits. Another ruling, Comcast Corp. et al. v. Behrend et al., in 2013, made certain class actions almost prohibitive. 7
On social issues, the views of liberal and conservative justices diverge cavernously. On economic and corporate issues, the two sides have much less daylight between them. The Supreme Court upheld abortion rights, affirmative action, and marriage equality, but expanded corporate rights and narrowed prosecutorial power. In the wider world of politics, conservatives have stirred the social anxieties of their base for decades as a smokescreen to mask their aid to big business. Liberals made a political choice to favor social reform over resistance to business impunity.
The Second Circuit Court of Appeals, the most influential appellate court for securities law, has similarly turned friendlier to business. The court has become, in recent years, less sympathetic to securities fraud cases. The Second Circuit has a storied history of pioneering rulings on social issues, but it has not been a lionhearted populist court when it comes to reining in Wall Street. New York, the Second Circuit’s major city, is a company town that manufactures paper: instruments such as stocks, bonds, and derivatives. The Second Circuit has hometown bias for Big Finance.
By the 2000s, a shift to the right began to become clearer. The Second Circuit started to become a more reliably pro-business, pro-defendant court. The appeals court gave more skeptical receptions to the government, district court judges who ruled harshly against white-collar defendants, and private lawyers who took on large corporations. No court, though, was pro–criminal defendant. The government still won the majority of its cases, and the appeals courts affirmed the vast majority of the rulings. But lawyers discerned a change.
In 2006 the court overturned the conviction of star technology investment banker Frank Quattrone because the lower court’s jury instructions allowed the jury to reach a verdict without finding enough evidence against him. The Second Circuit upheld Judge Lewis Kaplan’s ruling in United States v. Stein, the KPMG case in 2008.8 The court threw out Pelletier and Safwat’s convictions of the Gen Re executives. And now it had upheld the SEC’s ability to make namby-pamby settlements.
What explains the courts’ shift? Big business, seeing a crisis as it became more regulated in the 1960s and 1970s, counterattacked. In 1971 Lewis Powell, a partner at a Richmond, Virginia, law firm, wrote a memo for the US Chamber of Commerce calling for American business “to wake up and tell their story and that of the free enterprise system.” The corporate world faced threats from government oversight and activists such as Ralph Nader. Powell called for responses not only in the courts but also in academia, the media, and the Washington world of think tanks and lobbyists.9 Just two months later, President Richard Nixon appointed Powell to the Supreme Court, where he authored rulings that began to expand free speech protections beyond the realm of politics and into the commercial world.
Over time, the Powell initiative reaped success. A new right-wing faction arose: the antigovernment libertarian. Starting in the 1970s, the conservative movement funded legal efforts at think tanks and through lobby groups, such as the Business Roundtable and the US Chamber of Commerce. The legal world, especially, was deluged with these new conservatives. Classic conservatives were more deferent to government power. Liberals leaned pro-defendant, but more for the poor, indigent street criminals. That left corporate criminals with money but less power and few true friends. Then came the rise of the libertarian judge. The Democratic Party shifted, too. Democrat-appointed judges more often came now from private practice, where they had represented corporations. These new judges might be socially liberal yet willing to give corporations more sympathetic hearings.
The government backed down from fights to preserve its powers and retain verdicts. Despite this lack of assertiveness, the courts seem to worry about the opposite problem: that prosecutors are too aggressive and abusive. The Second Circuit appears to want to provide a countervailing force to ambitious US attorneys. Southern District US attorney Rudolph Giuliani propelled himself into New York’s Gracie Mansion in 1993 by parlaying a series of tough and media-friendly prosecutions of mobsters, politicians, and Wall Street bankers, traders, and lawyers in the eighties and early nineties. Higher courts largely affirmed Giuliani’s early prosecutions. In later years, though, he began to get reversed more often. Giuliani had become hubristic, but it also seemed that the appellate court appeared to want to lean against this government aggressiveness. The same sentiment seemed to arise with Preet Bharara, who has served from 2009 through the present day. He was another top federal prosecutor who roused cries of abuse from the defense bar and alleged white-collar miscreants. In 2014 the Second Circuit in United States v. Newman and Chiasson overturned Bharara’s marquee convictions of two hedge fund managers, ruling that the fund managers were too removed from the source of the insider information and did not know that the source was deriving a personal benefit. The decision threw insider trading law into disarray.
For Rakoff, the Second Circuit’s sympathy for the corporation had resulted in a public spanking. He had lost the battle, at least in the courts. But in between his initial ruling and his reversal, Rakoff had emerged victorious. He had become a celebrity. In his chambers, he hung up a framed article with the headline “ ‘Rakoff Fever’ Sweeps the Federal Bench.” A “Rakoff effect” swept the courts. He inspired at least seven federal judges to raise questions about SEC government settlements or to reject them outright. Another judge laid into a settlement with the Federal Trade Commission.10
Judge Rakoff first noticed the change in an opinion from Eastern District Court federal judge Fred Block. Reading a law blog, Rakoff saw that Block used the words “chump change” to refer to the paltriness of a particular SEC settlement—a reference to Rakoff’s “pocket change.”11
Judges had the power to review most settlements. Despite the Second Circuit’s Rakoff rebuke in the Citigroup case, judges were not going to stop scrutinizing them. Facing more skeptical judges, regulators began seeking tougher settlements, if gingerly. (In another, less salutary effect of Rakoff fever, the SEC and the Justice Department also began to develop settlements that did not require judicial reviews.)
After the Second Circuit’s stay but before its final ruling, on October 3, 2012, SEC chairwoman Mary Schapiro invited Judge Rakoff to speak with enforcement lawyers at the agency. That same year, the House Financial Services Committee held a hearing on the no-admit, no-deny practice. In May 2013 Massachusetts’s liberal firebrand Senator Elizabeth Warren, who began to make lax regulatory enforcement a cornerstone of her political message, wrote a letter to the new chairwoman of the agency, Mary Jo White, excoriating the habit. White wrote back defending it.
Then, in an abrupt turn a month later, in June 2013, White announced a change in policy. No longer would the SEC treat no-admit, no-deny settlements as the only option; it would now seek guilty pleas. She explained the agency would seek such admissions only when the misconduct was egregious. Such were the times that this incremental and commonsense change seemed momentous, especially to those announcing it.
Both the SEC and the Department of Justice, as much or more out of political pressure than true conviction, began to seek admissions in a small handful of cases. The Department of Justice wrung guilty pleas out of several major financial institutions, including Credit Suisse and UBS. A group of banks pleaded guilty to manipulating foreign exchange rates. The SEC also scored a handful of admissions. The admissions had a disappointing quality. The Department of Justice canvassed regulators to make sure they wouldn’t be compelled to do anything drastic in response to an admission of guilt, such as pull a bank’s license. Regulators assured prosecutors that they would not do so. So the wrongdoers were insulated from the consequences of their bad behavior, even as they admitted it. The reputations of the malefactors did not seem to suffer. After they admitted wrongdoing, bank stocks usually rose in response. Investors considered the problem resolved. The government worded the admissions and guilty pleas in a manner that insulated the entities from private lawsuits. In the past, regulators had seen private lawsuits as an adjunct to their mission. Now they were entering into settlements that undermined those suits.
• • •
Rakoff always had a different view of what a judge could be than many of his colleagues did. When he’d worked for the government as a prosecutor, he couldn’t easily speak his mind. On the defense side, he’d often take positions that were the exact opposite of what he believed. But a judge can speak his or her mind. Despite this freedom, few did. In his years on the bench, the legal profession turned ever more inward, valuing complexity, jargon, and specialization. Rakoff was, by contrast, turning expansive.
He had long ago given up ambitions to rise to a higher court. Only a handful of judges talk to the press and write for lay audiences. Rakoff had long understood the importance of the media and public perception. He had always given speeches and sat on panels, and expressed himself with his typical commitment to bluntness. In 2004 he’d written for the American Bar Association’s journal, Litigation, an article titled “Is the Ethical Lawyer an Endangered Species?” But he had usually been addressing legal audiences. Now Rakoff felt like he should begin to express himself publicly. “The judicial code in no way discourages judges from speaking out about general issues,” he says. “Indeed, the code of judicial ethics actually encourages judges to speak out.”
He could be more influential as a public intellectual. And it was more fun. He kept up a grueling schedule of speeches, appearances, and advisory roles. In addition to training Iraqi judges, he served as the cochair of a National Academy of Sciences committee on science and the law. If the firms no longer had lawyer-statesmen, nothing prevented him from becoming one.
Having seen the SEC in action and waited in vain for the Department of Justice to bring high-profile cases, Rakoff decided to speak out publicly on the topic of corporate enforcement. In May 2013 he gave a speech in Australia examining why there had been no criminal indictments of high-level bankers after the financial crisis. After he returned, he went onto the website of the New York Review of Books, his favorite publication, found the email address, and submitted a version of the speech blind. To his delight, Robert Silvers, the long-serving editor of the Review, published it in its January 9, 2014, issue.
Others had written on the topic, but Rakoff’s hit the hardest in the circles that mattered. He questioned the Department of Justice’s assertions that the cases were so hard to prove. He asked why prosecutors had not considered charging executives with “willful blindness,” a well-established legal doctrine making it illegal for people to consciously avert their eyes from bad behavior. Rakoff skewered Lanny Breuer for having mischaracterized the criminal law. In an interview on the PBS show Frontline, Breuer had said that prosecutors had to prove not only that a party made a false statement but also that those on “the other side of the transaction relied on what you were saying.”
Rakoff explained that this assertion “totally misstates the law. In actuality, in a criminal fraud case, the government is never required to prove—ever—that one party to a transaction relied on the word of another. The reason, of course, is that that would give a crooked seller a license to lie whenever he was dealing with a sophisticated buyer.”
No one of Rakoff’s stature had spoken out in this way. Through his jurisprudence and his public writings, the judge had lost in the courts, but enforcement policy had changed. The Justice Department’s argument that it had looked as hard as it could for criminals and evaluated cases on their full merits no longer convinced.