SEC’s Court Troubles in Citigroup Settlement Echo in Wisconsin
The U.S. Securities and Exchange Commission, facing growing judicial scrutiny over how it resolves enforcement matters, was asked by a federal judge in Milwaukee to provide a “factual predicate” for a proposed settlement with a company accused of accounting fraud.
Certain provisions of the SEC’s settlement with Milwaukee- based Koss Corp. were “vague,” U.S. District Judge Rudolph T. Randa said in a filing yesterday. The settlement also didn’t provide enough information to show that penalties against chief executive officer Michael Koss were fair, the judge wrote.
Randa’s decision comes less than a month after a federal judge in New York rejected the agency’s $285 million settlement with Citigroup Inc. (C), saying he hadn’t been given enough facts to approve the agreement.
The Citigroup ruling by U.S. District Judge Jed Rakoff, which Randa cited in his opinion, challenged settlement practices the SEC has had in place for decades and sparked a debate over whether the agency is reaching expedient agreements that lack tough sanctions. The SEC has appealed Rakoff’s ruling.
“If other judges start to follow Rakoff’s lead that’s a big problem for the SEC because they’ll have to try more cases,” said Adam Pritchard, a securities law professor at the University of Michigan Law School.
The SEC in October accused Koss Corp. (KOSS), a manufacturer of stereo headphones, of making materially inaccurate financial statements for fiscal years 2005 through 2009. The agency said Michael Koss failed in his roles as CEO and earlier as chief financial officer in overseeing accounting and finance at the company.
Randa questioned the adequacy of the Oct. 24 settlement’s provision that the company promise not to make future violations of securities laws, saying the agreement is vague and could pose problems for enforcing it in the future.
The question echoes a concern Rakoff raised about the SEC’s ability to penalize firms who have been repeatedly accused of violating securities laws. In his opinion on the Citigroup settlement, Rakoff called the New York-based bank a “recidivist.”
Randa also asked the SEC to provide more information to justify the amount Michael Koss will pay to resolve the claims. Under the agreement, Koss would forfeit a total of about $450,000 and 160,000 options, the equivalent of his incentive bonuses for fiscal years 2008 through 2010, according to the court filing.
“Without any factual predicate for how those disgorgement terms were determined and what more, if anything, could have been subject to disgorgement, the Court cannot assess their fairness and the extent to which they serve the purpose of disgorgement which is to deprive the violator of unjust enrichment and thereby further the deterrence objectives of securities laws,” Randa said in the opinion, noting that Koss and his family directly or indirectly own in excess of 70 percent of the company’s shares.
Randa asked the SEC to respond by Jan. 24.
Rakoff, in his November opinion, criticized the agency’s practice of resolving cases without requiring the subject of the allegations to admit wrongdoing. He said the settlement, which was meant to resolve claims that Citigroup misled investors in a $1 billion financial product linked to risky mortgages, didn’t provide him with “any proven or admitted facts” to inform his judgment.
In the proposed Koss settlement, the company and the CEO neither admitted nor denied the claims.
The SEC said in a Dec. 15 statement that Rakoff “committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits.”
To contact the reporter on this story: Joshua Gallu in Washington at firstname.lastname@example.org