Neither Admit Nor Deny

It’s spreading.  From Judge Jed Rakoff in the Southern District of New York to Judge John Kane in the District of Colorado.

The Proposed Final Judgment as to Van Gilder contains provisions and recitations that I will not endorse, namely: (1) a waiver of findings of fact and conclusions of law that is directly contrary to F.R.Civ.P. 52; (2) a waiver of the right to appeal, the acceptance of which is indisputably a matter of judicial discretion and for which no reasons are given to support the exercise of that discretion; (3) a statement that Van Gilder neither admits nor denies the allegations of the Complaint without providing any basis therefor; and (4) a permanent injunction prohibiting future violations of existing statutory law.

Rulings like this please neither party, both of whom enjoy the fruits of their agreement while avoiding certain issues they would rather not address.  The government gets to claim a “win” without proving any wrongdoing in fact occurred and collect its blood money, while the defendant gets to similarly claim a “win” by not being compelled to admit any wrongdoing and buys its way out of a tight spot.

The problem that Judge Kane has is that he’s an Article III judge, not a rubber stamp.

Approval is relegated to a mindless formalism and transparency is rendered void.

Cases brought by the government are different than disputes between private parties. If two guys want to duke it out in court, then reach a settlement, public policy isn’t implicated. It’s just between them and whatever they agree upon is hunky dory. But when an arm of the government, in this case the Securities and Exchange Commission, prosecutes a case against a party, it does so in our stead.

This raises a bundle of issues about what our government is doing and why.  Much as we speak to the coerced plea stemming from the threat of life plus cancer after trial in a criminal prosecution, this is the business/corporate analogue.  Is there any merit to the SECs case?  Who knows?  They could throw a dart at the stock page in the paper and prosecute, and neither the public nor the court would be any wiser about the nature of the claim.

On the one side, this provides the SEC with carte blanche to go after a corporation for some claimed wrong, whether real or perceived, or imagined for that matter, and by mere dint of raising a claim, force the machinery of corporate America to engage in a cost/benefit analysis.  As soon as a complaint is filed, stock price plummets. Shareholders scream. Wild-eyed business pundits beat cowbells on television, and no outsiders have a clue whether there is anything wrong, or something dangerously, disastrously wrong, happening.

It’s great work if you can get it.

But did the government sell out the American public in a secret deal that covers up horrible corporate malfeasance for a quick buck, or did the corporation sell out its shareholders by succumbing to government extortion because some snot-nosed kid prosecutors think they know how to run a multinational corporation better than its board of directors?  If the judge approves the settlement, nobody ever knows.

That Judge Kane has refused to play this game anymore, joining Judge Rakoff who was roundly excoriated by the government for stepping on their path to an easy win and quick money, reflects a bit of militancy that was missing for the past generation.  If a side had to be picked, it would be that the government has gotten away too easy, raising spurious allegations without any fear that it would be put to the test.  After all, the skill is in picking the right number that the corporate defendant will pay rather than going to trial.

But the flip side is cowardice by corporate America.  It’s understandable that no individual corporation wants to become the poster boy for “screw the government, we did nothing wrong,” only to have a $27 gazillion verdict against them.  Bet the farm litigation against the government is never a good bet.  But letting the bully have his way isn’t a good way to end the bully’s reign either.

Many view this stance by judges as a huge dilemma, forcing both sides into positions they would prefer not to take.  It’s understandable that a corporation doesn’t want to be forced to admit wrongdoing that it could otherwise pretend didn’t happen, but for the huge redistribution of corporate revenues.  And it’s similarly understandable that the government can expend resources far more efficiently by demanding payments from corporations without having to send in a guy to break kneecaps.

But none of this is good for the public or for the integrity of the system.  And it’s especially unseemly for the judge who sits on the bench, pen in hand, ready to work, work, work like Governor William J. Le Petomane in Blazing Saddles.

H/T Stephanie West Allen

4 thoughts on “Neither Admit Nor Deny

  1. Michael Carin

    Great theory if the assumption that the SEC and corporations are distinct adverse and competing interests is true. A completely different conclusion results if you assume that the SEC and businesses possess numerous conflicts of interest because executives become regulators and vice versa without threat of adverse action. Then, your case predictably falls into confidential morass. The only entity, in that scenario, which cannot determine the merits of the deal is the public.

    1. SHG Post author

      It seems there is a point in there, but I have no idea what it is. Can you explain what you’re talking about?

      1. Jon

        I think he might be suggesting that the regulators are in bed with industry leaving affairs of state taking precedent over the affairs of state.

  2. Seth

    As a member of the public, whose primary interest is in knowing the facts (and secondary interest is in wrongdoers being punished), I’d be willing to allow a cap on damages based on the settlement amount (e.g. if they’d settle for $350 million, go to trial with a penalty constrained to be from $0 to $700 million). That way, there’s still an incentive to fight (which, in our system, is how the truth gets out) but the company isn’t risking the $27 gazillion disaster.

    I put the interests in that order because under our system the second one isn’t going to happen properly.

    I’ve also said that corporations can’t do stuff, people can do stuff (which they often do on behalf of corporations). If stuff done was illegal, then people did illegal stuff, and ought to be charged criminally. I think that’s more important than “punishing” corporations. If a person thinks “If I do X (illegal, perhaps) for my employer, they’ll make a lot of money and I’ll get a big bonus/raise/promotion. Maybe in a few years the company will be punished for it, but I’ll have switched jobs or retired by then anyway” he’s likely to do X. If, instead, the downside is “They’ll put me in jail when they prove I did X” he’s a lot less likely to.

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