"Hallowed By History, But Not By Reason": Judge Rakoff's Critique of the Securities and Exchange Commission's Consent Judgment Practice

Over the past several years, in a trilogy of opinions, Judge Jed S. Rakoff of the United States District Court of the Southern District of New York has established himself as a minor cult hero for daring to question the wisdom of the long-running consent judgment practice of the Securities and Exchange Commission (“Commission”). At its core, each opinion addresses issues of affinity for settlement, judicial deference to the judgments of administrative agencies and the general theory of damages in cases of corporate malfeasance. Much attention has been focused on the high-profile nature, appealing facts or colorful judicial language of each of the controversies. Yet, the value of the judge’s opinions is found elsewhere – in the basic questions he dares to confront regarding the proper role of the courts in validating and enforcing the special kind of settlement known as the consent judgment. The judge’s agitation reveals a practice “hallowed by history, but not by reason” and sheds light on a curious corner too long unexamined and unquestioned out of deference, convenience, apathy or some combination thereof. As Judge Rakoff notes, “in any case . . . that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.” This Article examines each of the three relevant opinions in an effort to articulate Judge Rakoff’s critique within a framework that remains faithful to the deference that should be accorded administrative agencies and respectful of the proper judicial function. The Article explores the history of the consent judgment practice at the Commission and examines the motivations and developments that have made it all too convenient for the Commission and defendants to routinely favor settlement. The Article also suggests a more active role for courts is both necessary and responsible in cases where the Commission seeks judicial enforcement powers to assist in the monitoring of wrongdoers post-settlement. Finally, the Article explores the anticipated results of this issue’s new found attention and theorizes as to the likely effects on the Commission’s ongoing practice of gaining settlements.