April, 2013
Washington -- As a matter of public policy, too many pre-trial settlements in cases of civil fraud are a bad idea. At least some of the cases should go to trial to let the public see what the alleged perpetrators did and how government enforcement agencies responded.
Widespread financial fraud involving banks, securities dealers, traders, mortgage lenders, and student loan lenders has been afoot throughout the land for a decade or more, but hardly any cases go to trial. The cases are settled with payments among the parties involved, including the U.S. government, and records are sealed or destroyed. The perpetrators are out the money (often only a fraction of the fraud involved); in exchange they have essentially purchased the right to claim that they have not been convicted of wrongdoing. The plaintiffs are seemingly satisfied with the payments and with the public knowledge that the perpetrators really, really, really did not want to go to trial to let the public see the evidence of what they did. In other words, the public should look at the size of a settlement to get an idea of the fraud and which party would have won at trial.
This is a bad bargain for the public interest. The public should not have to guess at what happened based on scanty settlement information. Some judges agree and will not routinely approve such settlements. Federal district judges Jed Rakoff and Sidney Stein in New York are examples of judges who think the public may have more of an interest in seeing the evidence than the settlement parties have in concealing it.
These two judges have held up major financial fraud settlements including those involving the SEC. Good for them! To me, the idea that going to trial would clog up the courts -- a reason some judges use to encourage or force settlements -- must be balanced against the salutary effect an occasional trial would have on would-be fraudsters.
I recently settled a case (with DOJ's assistance) involving financial fraud with the Kentucky Higher Education Student Loan Corporation. I was the qui tam relator in the case under the False Claims Act. Given my distaste for settlements, I nevertheless agreed to settlement in this case because the several million dollars coming back to the U.S. Treasury is substantial. My share is also significant; and the ability to put a sizeable amount of it immediately to good charitable use to combat financial waste, fraud, and abuse was an important consideration.
Equally important is that this settlement does not include any "gag orders" on either party. The lender may say what it wants about me, and vice versa. Evidence is not under seal or destroyed. There are no restrictions on what I may do with my own share (such odious provisions are contained in many settlements). This case, along with another case I settled in 2010 against Student Loan Finance Corporation of South Dakota (which failed to live up to its settlement agreement), provides a good opportunity for researchers and academics to see behind the usual screens that obscure a clear view of financial fraud. A good study using these two examples would look at clever but illegal financial tricks; how the manipulations could be slipped by the government; how bond counsels, accounting firms, and ratings agencies could be misused, perhaps willingly; and how the government itself responded, sometimes appropriately, but often ineptly.
The wave of settlements without trials over the past decade has been a missed opportunity to combat financial fraud, but with a good case study perhaps the next generation can learn in the classroom what has been missed in the courtroom.
