Judges sound off on leniency in bank settlements

WASHINGTON — Everything was rolling along traditional lines. A bank broke the rules. The government found out. The company agreed to pay a fine and improve its behavior.

And then the judge assigned to OK the deal blew his top.

In a scene that is becoming increasingly common, Judge Emmet Sullivan of U.S. District Court chewed out federal prosecutors at a hearing in Washington recently for a proposed settlement with Barclays.

“Why isn't the government getting tough with banks?” he asked.

Just one day earlier in the same courthouse, Judge Ellen Segal Huvelle refused to sign a settlement between the government and Citigroup, demanding, “Why would I find this fair and reasonable?”

She ordered government lawyers to return with answers.

The scoldings from the bench are a striking departure from a long tradition of judicial deference to settlements formulated by federal agencies, reflecting broad disenchantment not just with Wall Street but with its government overseers.

It is a pattern that began last year, when Judge Jed Rakoff of U.S. District Court in Manhattan denounced the Securities and Exchange Commission for going easy on Bank of America, which the agency had accused of misleading its shareholders.

“The courts are staking out a role that frankly we seem to need,” said Jill Fisch, a law professor at the University of Pennsylvania. “They are standing in for the general public, the public interest, and demanding more” from regulators.

The immediate impact, however, has varied. Courts have limited power over settlements. Rakoff persuaded the SEC to punish Bank of America with a larger fine, but Sullivan gave approval recently to the deal between the Justice Department and Barclays after airing his concerns for a second day.

Experts also disagree about the long-term consequences. Some, like Fisch, expect regulators to seek more punitive settlements. Others said agencies instead would favor lenient penalties that do not require judicial review.

The Barclays settlement, which Sullivan approved recently, involved charges that the British bank helped customers in Iran, Cuba and other sanctioned nations move more than $500 million into the United States, breaking federal law — and undermining national policy — for more than a decade. The bank distributed instructions to employees for circumventing internal controls, for example by obscuring the source of the transfers.

Moreover, employees knew the transfers were illegal.

The cover sheets “must not mention” the offending entity, which could cause the funds to be seized, one employee wrote in an e-mail quoted by prosecutors. “A good example is Cuba, which the U.S. says we shouldn't do business with but we do.”

The Justice Department agreed not to pursue criminal charges against the bank. In exchange, Barclays admitted to wrongdoing, forfeited $298 million and agreed to improve employee training.

Justice defended the settlement as a “serious sanction” and said it did not seek a larger fine because Barclays had disclosed the crimes and cooperated with prosecutors.

“The public looks at this and says, you know, they're getting a free ride here,” Sullivan told government attorneys.

He said he agreed to approve the settlement despite his concerns because it is not his job to supervise the department.

Under the terms of Citigroup's proposed settlement, which Huvelle has questioned, the bank would acknowledge concealing from shareholders the extent of its investment in subprime mortgages, which totaled more than $50 billion in 2007. The chief financial officer at the time, Gary Crittenden, told investors that the bank's exposure totaled only $13 billion.

The SEC calculated that the company realized an economic benefit of up to $123 million from its misrepresentations but proposed to settle for a fine of $75 million.

“You expect the court to rubber stamp, but we can't,” Huvelle said.

Rakoff told an audience at Stanford in June that he hoped other judges would follow the example that he set last year in the Bank of America case.

That case, he said, “may enable some of my colleagues to be a little more proactive in assessing SEC settlements in the future.

“I like to think that it will contribute to greater justice.”

But David Ruder, chairman of the SEC in the late 1980s, said regulators were in a better position to determine the fairness of a settlement because they commanded both the specifics and context of each case.

“It's my view that by and large the judge ought to give great deference to the judgment of the agency as to what's the appropriate punishment,” said Ruder, now a law professor at Northwestern University.

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