They’re like stealth bombers.
A growing number of federal judges have had about as much as they can take with Wall Street firms paying hefty fines to settle probes into serious wrongdoing — without admitting any guilt or any executive taking the fall.
So at least four judges, in New York and Washington, are not going to take it any more.
The mostly quiet attack by these judges on a long-standing business practice could mushroom into one of the most serious threats to bad corporate culture in many years.
The pushback against the “neither admit nor deny guilt” settlements comes as many Americans grow frustrated that few executives have been held personally accountable for toxic mortgages, betting against the client and insider-trading practices.
The latest example of judicial frustration came this week when Manhattan federal judge Sidney Stein raised concerns about a $590 million settlement agreed to by Citigroup to settle charges it deceived shareholders about its toxic mortgage holdings.
The shareholder suit named former CEO Chuck Prince and senior adviser Robert Rubin — but only the bank and not the executives paid out to settle the case.
“Does the absence of any payments from the individual defendants render the settlement unfair to class members who still hold the Citigroup stock they purchased during the class period?” the judge asked in a memo announcing a hearing to discuss the terms of the controversial deal.
“In the cases where there’s really egregious behavior, I think to let these people off scot-free is just wrong,” said Lynn Turner, with the $37 billion Colorado Public Employees’ Retirement Association.
Just last month, Manhattan federal judge Victor Marrero questioned a record $602 million settlement the Securities and Exchange Commission hashed out with hedge-fund giant SAC Capital over allegations of insider trading.
In it, SAC neither admitted nor denied guilt.
“It seems counterintuitive and incongruous to settle a case for $600 million that might cost $1 million to litigate,” Marrero said. “How believable is it to the public, the claim that they did nothing wrong?”
In December, Washington, DC, Judge Richard Leon refused to approve a $10 million deal between the SEC and IBM over bribery allegations.
At the time, Leon said he was among “a growing number of district judges who are increasingly concerned” about weak settlement policies.
The first judge to kick up a storm was Manhattan federal Judge Jed Rakoff in 2011. He rejected the SEC’s $285 million pact with Citigroup over the sale of soured mortgage-backed securities.
Rakoff said the deal, which allowed Citi to “neither admit nor deny wrongdoing,” came at “the expense, not only of the shareholders, but also of the truth.”
The SEC has appealed and has defended the practice as necessary to free up scarce resources. A decision, which could push companies to admit guilt or nudge them to trial, is expected in the next several months.