Rakoff accuses SEC of misleading federal court

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The war of words between the Securities and Exchange Commission and Judge Jed Rakoff escalated on Thursday after the jurist accused the corporate regulator of misleading two federal courts.

Judge Rakoff’s claims were levelled in an order in response to an emergency request by the SEC for an appeals court to temporarily halt proceedings in the regulator’s litigation against Citigroup.

The jurist accused the SEC of making “materially misleading” statements to the appeals court and of misleading his own court through its application for a stay in proceedings.

Judge Rakoff’s claims that the SEC misled him and the appeals court threaten to worsen the regulator’s already fractured relationship with a judge who has derailed its previous settlements with alleged Wall Street wrongdoers.

The allegations come as the SEC scrambles to salvage a $285m settlement it reached with Citi in October to resolve allegations that the bank defrauded investors in a $1bn mortgage-linked investment. In a rebuke to the agency, Judge Rakoff last month rejected the settlement, arguing that it was neither reasonable nor in the public interest, in part due to the SEC’s longstanding refusal to force defendants to admit guilt when settling cases.

As the SEC tried to keep the deal intact, it requested that Judge Rakoff halt proceedings while it pursued an appeal. Meanwhile, Judge Rakoff had set a January 3 deadline for Citi to answer the SEC’s fraud charges.

The SEC feared that if Citi denied the accusations, it would derail its settlement agreement. Judge Rakoff had a December 30 deadline to decide whether to halt proceedings and delay Citi’s filing.

But as Judge Rakoff deliberated the regulator’s request, the SEC around noon on Tuesday filed its emergency request before the appeals court, arguing that Judge Rakoff had “failed to afford the relief requested”.

Later that day, the SEC and Citi called Judge Rakoff to present Citi’s request for additional pages to fit its answer to the agency’s allegations. Neither the SEC nor Citi told the jurist that the SEC had submitted an emergency filing before the appeals court, Judge Rakoff said.

Shortly after, the appeals court agreed to temporarily halt proceedings, a decision made one minute before Judge Rakoff denied the SEC’s request for a stay. His decision was superseded by the appeals court.

The SEC filed its emergency application “without any notice to this court and without inquiring as to when the court was going to issue its decision”, Judge Rakoff said, and in doing so the agency told the appeals court that Judge Rakoff had not yet acted “without mentioning ... [that] the SEC was on notice that this court’s decision was imminent”.

Judge Rakoff added that Citi’s and the SEC’s failure to notify him “even while holding a telephone conference with this court” that the agency had made an emergency request “held back from this court material information it needed to do its job”.

The SEC said it would respond to Judge Rakoff in court. The jurist ordered the two sides to “promptly” notify him of any future appeals court filings “to prevent similar recurrences”.

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