Three cheers for two brave judges

In their courts, each recently delivered clear messages that corporate wrongdoing won't be tolerated and that the consequences for securities violations will be severe. Last month, Mr. Holwell sentenced Raj Rajaratnam, the former head of the Galleon Group of hedge funds, to 11 years in prison, the longest sentence ever for insider trading. A jury convicted Mr. Rajaratnam of securities fraud and conspiracy in May after a two-month trial. “Insider trading is an assault on the free markets,”the judge said at the sentencing. “His crimes reflect a virus in our business culture that needs to be eradicated.” For good measure, Mr. Holwell imposed a $10 million fine and ordered Mr. Rajaratnam to forfeit $53.8 million in ill-gotten profits. Because inside traders harm everyone by undermining trust in financial markets, Mr. Holwell's action made a statement that will go a long way toward restoring confidence in those markets. It is my hope that his decision will serve as a model for other judges when they are presented with similar cases. Investors and shareholders deserve it. One judge who needs no such guidance is Mr. Rakoff, who in 2009 challenged a $33 million settlement worked out between the Securities and Exchange Commission and Bank of America Corp. over the bank's acquisition of Merrill Lynch & Co. Inc. He is at it again. Two weeks ago, Mr. Rakoff raised questions about why he should approve the SEC's proposed settlement of fraud charges against Citigroup Inc. over a mortgage bond deal. Mr. Rakoff, who has been a thorn in the side of the SEC for years, demanded that both sides show up to his courtroom for a hearing Wednesday with answers to his nine sternly worded questions about the settlement, which was reached Oct. 19, and the SEC's charge that Citi misled investors in a $1 billion deal known as Class V Funding III. As he has done in the past, Mr. Rakoff went against what many industry observers expected; he challenged the carefully crafted deal. He delayed his decision and, in doing so, raised questions about the SEC's resolution policies. “Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud, but the defendant neither admits nor denies wrongdoing?” Mr. Rakoff wrote in a four-page order.

STRONG STATEMENT

He asked SEC officials why they penalized Citigroup and its shareholders instead of the bank executives who actually committed the wrongdoing. To that point, SEC Chairman Mary Schapiro has been quoted as saying: “The SEC needs to send a clear message that corporate wrongdoing will not be tolerated, and penalties for securities violations will be stiff.” That is a strong statement. However, corporations don't commit wrongdoing, per se; individuals do. So in order to prove that the SEC actually means business, the commission must settle not only with corporations but also with the individuals at those companies responsible for the actions. Mr. Rakoff has been challenging the SEC to do just that for several years. In the Citigroup case, he also ordered the SEC to explain why the proposed penalty — $95 million — is so much less than the $535 million assessed by the commission last year as part of its deal with The Goldman Sachs Group Inc. in a similar case. Mr. Rakoff's concern is whether the payment is in the public's interests. Industry observers applauded him, saying that his challenge of the SEC-Citigroup deal is a welcome change from the rubber stamps given by other judges when they sign off on Wall Street-SEC agreements. The Citigroup case, coming at a time when the SEC is working to restore its damaged reputation in the enforcement area, certainly will earn the commission no gold stars. The public is angry, and Mr. Holwell and Mr. Rakoff are sending messages that investors and shareholders deserve justice when they have been lied to, misled and cheated.