Rakoff seeking truth of Wall Street wrongdoing labeled rogue

Gupta Trial

Rakoff is also presiding over the criminal trial of Gupta - - one of the highest-profile insider-trading cases -- which begins in May. Gupta, also a former Goldman Sachs Group Inc. director, is accused of leaking inside tips to hedge-fund founder Raj Rajaratnam, who was sentenced to prison for 11 years. As part of an SEC lawsuit, Rakoff ordered Rajaratnam to pay $92.8 million, the largest such penalty ever. Gupta denies wrongdoing, his lawyer says. Rajaratnam is appealing.

Rakoff’s decision in the Citigroup case has added fuel to criticism from investor advocates that the SEC is too cozy with Wall Street. Since 2001, the commission has settled five fraud cases with Citigroup, the world’s third-largest lender. None of them involved an admission of wrongdoing, and all of them included a promise not to commit fraud.

The penalties have been too small -- totaling $765 million -- to serve as a deterrent, says Dennis Kelleher, chief executive officer of Better Markets Inc., a nonprofit group that promotes transparency in markets.

Admitting Fault

“The SEC penalties are not even a slap on the wrist,” he says.

If Rakoff’s position prevails, it will change the way the SEC enforces the law. The agency would have to make deals in which defendants admit some fault, and this would lead to many more trials. That’s because most businesses would be unwilling to make such admissions, which could be used against them in court by other litigants including shareholders. So companies will opt for litigation, says Maria Ghazal, counsel for the Washington-based Business Roundtable, which represents U.S. chief executives.

Robert Khuzami, director of the SEC’s Division of Enforcement, said in December that forcing cases to trial will hurt shareholders in the end.

‘Wronged Investors’

“The result would be longer delays before victims get compensated, the expenditure of SEC resources that could be spent stopping the next fraud and -- quite possibly -- less money in the pockets of wronged investors,” he said in a speech to the Consumer Federation of America.

To avoid judges like Rakoff, the SEC might bypass district courts and bring cases as administrative actions, where it would have more leeway in making deals, says Peter Henning, a professor at Wayne State University Law School.

“The outcome of the appeals case could have a significant impact on our practice,” says George Canellos, who heads the SEC’s New York office.

Some legal scholars say Rakoff is close to overstepping his authority by acting as if he’s a regulator.

“You get a picture of a judge who sees himself as an active player in the political process,” says David Skeel, a University of Pennsylvania law professor. “That he enjoys having his picture in the New York Times is something that makes other judges grimace.”

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