Federal District Court Judge Jed Rakoff shook up the securities bar with his widely reported rejection of a settlement between the Securities and Exchange Commission and Citigroup. The decision and order has thrown into turmoil decades of what Judge Rakoff sees as shoddy enforcement practice. It’s nicely laid out on the PorterWright Federal Securities blog, here.
This blog takes no position on what Citigroup did or how good the SEC is at doing its job, but we do applaud Judge Rakoff for helping to illustrate the point that most settlements don’t tend to shed very much light on what actually happened prior to the commencement of litigation.
That’s important, because when investigating a person or company, the overwhelming majority of legal actions end in settlement. You can almost never tell from the documents whether:
1) The complaint was overreaching and the complainant settled for peanuts;
2) The complaint was well founded and the respondent forked over a boatload of cash because he was going to lose anyway, and saw no point in paying a lawyer through a long trial to come to the same result, or;
3) Something in between.
How do you find out what happened before the litigation occurred and in the negotiations leading up to a settlement? It’s hard work, and always involves interviewing people. What it cannot involve, all on its own, is looking at the court documents. Those usually just say “Dismissed with prejudice.”
What was said during depositions leading up to the settlement? You won’t find that on PACER. Who got fired as a result of the lawsuit and would be willing to talk about what happened in the days or years leading up to the lawsuit? Look all you want in the court documents – it won’t be there.
Prospective clients sometimes wonder why in the age of the internet background checks can’t just cost $300. One reason is that any robot can find a federal court document that says “dismissed with prejudice.” But it takes a professional’s time to look behind those documents and to analyze dozens of moving parts to find out what probably led to the settlement.