In the United States one of the most basic principles of Justice in that of Innocent until proven guilty. A second principle, also enshrined in the Constitution, is the Separation of Powers. The Legislative Branch makes the laws, the Executive Branch enforces the laws, and the Judicial Branch judges the application of those laws.
Over the years, much has been made of the idea that the Executive Branch has tried to usurp powers of the Legislative Branch, and there are some pretty good arguments to be made about that. In fact, there has always been a series of struggles between the branches with one side or the other claiming the territory in the middle where overlaps tend to occur. Today, however, a Federal judge declared Enough!
Justice is often derived through what we call Plea Bargaining. In short, it means that the State will charge you with a lessor crime, or agree to a stipulated punishment in exchange for a guilty plea. This is most often used in the criminal justice system, and serves some useful purposes. If it is clear that the defendant will likely be found guilty, it means the State can avoid the costs of a trial. It also means the defendant is able to avoid a more significant punishment which might well result from a trial.
As long as the trade off is reasonable, it's probably a decent arrangement. If the defendant believes he/she can win at trial, the option is always there so the rights of the accused are maintained. It also tends to ensure that the State doesn't lose a trial simply because of a technicality.
However, not all Plea Bargains are created equally.
Today the Security and Exchange Commission (SEC) presented a proposed settlement to a Federal judge in a case dealing with CITIgroup. The judge rejected it.
In short, simple terms the case goes like this.
CITIgroup created one of those famous Mortgage Backed Securities. They picked some loans that were, at best, questionable and bundled them together. They sent their salespeople out to sell the creature. At the same time, they took a "short position" on it, meaning they were betting it would fail. They didn't tell the potential investors any of that. In simple terms, they committed Fraud. Now, that's not the technical term for what they did, but it's the simple and accurate description of the whole affair.
So, they got caught. The SEC looked it over and told them they had broken the law.
The usual route for these things is that the two sides negotiate a settlement. The defendant agrees to pay some money and gets off. The SEC trumpets that they're looking out for the public, so they look good. The most important thing, which is almost always there but never really emphasized, is that the agreement says the the defendant doesn't admit guilt. Therein lies the problem, and judge Jed Rakoff noticed.
Today he announced that he wasn't accepting the agreement, and here's his reasoning.
As a judge he's supposed to rule upon the application of the law. However, since no one pled guilty to anything, how can he conclude that the agreement is reasonable. CITIgroup can pay and walk away saying "We didn't do anything wrong." They weren't found Guilty! It's pretty much like a Monopoly Get out of Jail Free card, except it's not quite free. It's more like bribing the cop. Our Justice System isn't supposed to work that way.
The Judge rightly concluded that this could be considered in two ways.
First, it could simply be a "shakedown" by the SEC. They charge somebody, the somebody buys them off, and everything's good. It could easily be the Government running a Protection Racket.
The second way is more dangerous. If CITIgroup actually pled guilty, then all those investors could line up and sue them. "They were found Guilty of fraud, so I want my money back...plus interest and penalties." From the investor point of view that makes perfect sense.
In short, the Judge said he has no way to determine if the Settlement Agreement is just...for either side. Amen!
The SEC and its defenders say it would simply costs too much to take these cases to trial, and they would have to cut back on the number of cases they investigate. The cost question is likely true, and clearly there would be an impact. However, let's look at this another way.
If we said "We're going to let this murderer off with a sentence for Jaywalking because it costs too much to try him, and we might not be able to try other criminals" I doubt too many people would agree.
Considering the money involved here, that's actually a fair comparison. The original security CITIgroup was selling was worth (supposedly) $1billion. The fine in the settlement agreement is only $285 million. If they were found guilty at trial, the fine would likely be higher...AND...a billion dollars worth of investors would be lined up at their door, each with a lawyer in hand. The murderer gets off with Jaywalking!
Personally I'm thankful the Judge stood up and said Enough! It's about time "special people" didn't get a "Special Deal" within the Justice System. They get enough special deals in the tax system already. And maybe...just maybe...if a few of these went to trial, or required that the company admit guilt as a part of the settlement, there would be fewer cases to investigate in the first place.