Too Little Help to Investors, Homeowners Comes Too Late

Friday, December 23, 2011

Page 6

IN MY OPINION (Column)

Too Little Help to Investors, Homeowners Comes Too Late

By GERT K. HIRSCHBERG

(The writer is a retired trial lawyer, an American Board of Trial Advocates member since 1978 and a former professor of torts at five California law schools. He counts 4,000 of his former students among California’s lawyers and judges. He was presiding referee of the Disciplinary Board, later called the State Bar Court. He is a former member of the State Bar Board of Governors—1980 to 1983—and the Judicial Council of California.)

Lawyers who are in the general practice of law are familiar with the requirement that to effectuate a settlement involving a minor, a compromise and settlement must be filed and approved by the superior court. Sometimes such settlement approval is waived by the defense, but not often. After all, a judicial compromise approval assures the defense of the finality of the settlement. The practice of seeking this approval is common and perfunctory. In most cases, a law firm sends its most junior associate to bring the motion and to make the appearance.

To the chagrin of a large part of the economic community, a large settlement in late November was disapproved by a courageous federal judge in New York. It was not a routine injury case.

It did not involve a minor. Rather, it was a highly publicized case involving big players, i.e., the Security and exchange Commission and the largest of all banks, Citigroup. The Security and exchange Commission is a governmental entity which is empowered to file suit for misconduct involving business or corporate matters. It has no penal enforcement power.

The allegations were simple. The bank misled investors about the exposure in risky subprime loans. Then the bank, as principal, bet against the investments and made $160 million in the process. In other words, the bank was lying as a fiduciary. If an attorney practitioner engages in such misconduct, he/she would be disbarred.

The settlement judge was Jed Rakoff. He was outraged. He disapproved the proposed settlement saying that it was pocket change for Citigroup. He indicated that the settlement was neither reasonable, no fair, nor adequate, nor in the public interest. To further indicate his outrage, he declared that the specific provision (finalized at the behest of the defense) that said settlement was not an indication of culpability was an absolute sham. He completely rejected the settlement of $285 million. The SEC has a duty to see that truth emerges. Deference or convenience do not apply. The case was set for trial July 16, 2012. Even the SEC estimated that the total losses to investors were approximately $700 million. Other judges, in particular, . Judge Ellen Huvelle, have likewise in the past shown hostility toward the agency’s settlement practices.

Perhaps in an effort to save face, or perhaps due to highly publicized notoriety, what followed shortly thereafter was an SEC action brought on substantially similar grounds against six former executives of Fannie Mae and Freddy Mac. Be it remembered that taxpayers had paid over $151 billion for the Fannie and Freddy takeover. Similarly to the prior abortive settlement with Citigroup, the defendants’ contention was included that they admitted responsibility without admitting wrongdoing. What kind of nonsense is that?

These actions should not be confused with the actions of the California Attorney General, Kamala Harris, to pull out of settlement negotiations with the biggest banks over alleged foreclosure abuses. Other state attorneys general and the Obama administration had been engaged in settlement talks with the largest banks over “robo signing” and other questionable foreclosure practices. California’s attorney general had simply concluded correctly that suits against the banks were inadequate considering all the circumstances.

The difference? The SEC action was designed to protect investors from lying by the banks. The action by the attorney general was designed to protect homeowners from abuses, not the investors?

Do the investor, homeowner, and the public need help to be rescued from the misdeeds of 2008? Yes, but it’s too little and too late.