U.S. District Judge JEd Rakoff, who recently rejected a proposed $33 Million settlement that would have resolved th U.S. Securities and Exchange commission's clai that Bank of America Corp. deceived investor about bonuses to be paid to Merrill Lynch executives. (James Patrick Cooper)

From a courtroom in Manhattan, not far from the epicenter of the nation’s financial crisis, a longtime federal judge is becoming a hero to many and a nightmare to some for demanding greater accountability in cases of alleged Wall Street fraud.

Jed S. Rakoff is driving regulators nuts by refusing to rubber-stamp the kind of deals that have long defined Securities and Exchange Commission justice — boilerplate settlements in which companies use shareholders’ money to pay fines while they neither admit nor deny doing anything wrong. The latest example called for Citigroup to pay $285 million for alleged misconduct during the mortgage meltdown.

The potential impact of Rakoff’s stand goes beyond the financial arena to other industries and regulators that rely on negotiated settlements.

“This is Jed Rakoff against the world,” said Joel Seligman, a scholar of securities law.

The dispute seemed to take on a more personal edge over the holidays, when Rakoff accused the SEC of blindsiding him during legal maneuvers. And the battle lines became sharper this month when the Business Roundtable, a major corporate lobby, weighed in on the side of the SEC in its quest to see Rakoff’s ruling in the Citigroup case overturned.

The judge’s fans — and how many judges have fans? — see him as the rare authority trying to impose Wall Street penalties that fit the offense. Rakoff for president, some say.

Critics — some with a stake in business as usual — see him as a headline-chaser who could end up undermining his own agenda by forcing the SEC to actually win its cases.

“Novel” and “potentially dangerous,” the Business Roundtable said of his position.

Largely lost in the din are deeper truths about the man who, for better or worse, could single-handedly force a revolution in the way the government polices Corporate America.

First, far from being an outsider to the world of white-collar enforcement, Rakoff, 68, is part of an old boys’ (and girls’) network that dominates Wall Street justice.

Earlier in his career, as a Justice Department prosecutor and then a white-collar defense lawyer, Rakoff worked closely with the SEC. Decades ago, he was even interviewed by an SEC chairman for the job of SEC enforcement director. Someone else got the job. Rakoff said he had not applied for the position and pursued it with only halfhearted interest, partly because of the financial trade-off it would entail.

Second, Rakoff isn’t just calling for Wall Street to be held accountable. He’s also insisting that the government be held accountable when it uses its power to make accusations and exact penalties. Law enforcement, he argues, should be more than a government shakedown.

“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” he wrote. “If its deployment does not rest on facts — cold, hard, solid facts, established either by admissions or by trials — it serves no lawful or moral purpose and is simply an engine of oppression.”

The SEC complains that Rakoff would require it to spend more time and money on trials, thereby reducing the number of cases it can pursue. But there’s another dimension. By insisting on proof — not just by tying up resources — Rakoff could well deter regulators from taking some enforcement actions.

In that sense, the rulings that have given Rakoff such celebrity or notoriety of late are the culmination of a long-held concern for civil liberties.

On Sept. 11, 2001, he looked out his office windows in horror to see people jumping from the inferno at the nearby World Trade Center. Yet he later fought what he feared were abuses of power in the government’s response.

“If, in the name of combatting terrorism, we so restrict our own freedom, have we not thereby lost part of the very battle we seek to win?” Rakoff said in a 2003 commencement speech.

As a Harvard law student and opponent of the Vietnam War hoping his draft number would not be called, he was in Harvard Yard in April 1969 when student activists seized an administration building and ejected the deans, he said.

Yet Rakoff could not identify with the demonstrators. In their intolerance of dissent, he said in an interview, “I felt that the students had their own totalitarian tendencies.”

And, having lost a brother to murder, Rakoff recalled, there was a time when he would have enthusiastically supported the death penalty. (His brother died in the Philippines, where the killer got a three-year sentence.) But later, after much research and contemplation, Rakoff issued an opinion declaring the death penalty unconstitutional on the grounds that justice is fallible and innocent people could be executed.

On a bulletin board in the judge’s chambers, a pair of newspaper headlines about different cases makes the point that people oversimplify the judge at their peril.


“Rakoff, the hanging judge,” says another.

* * *

The judge at the center of the maelstrom agreed to a series of interviews but said he was not at liberty to discuss the Citigroup case.

In hours of conversation since late November, he exuded wit and wisdom about life that seemed part rabbinical and part borscht-belt comedy.

Asked for his reaction to the adulation he has received online, he said, “I’m sorry my wife’s not here to give the rebuttal.”

He described how she packs him peanut-butter-and-jelly sandwiches (his choice, not hers) for Saturdays and Sundays spent working alone in his courthouse office.

He told of their decision to take up ballroom dancing late in life. “When I was a kid, and for many years after,” he said, “I was your classic afraid-to-dance-type person.” Now, wearing a black tuxedo and top hat to her sequined yellow dress, he whisks his wife across an exhibition floor.

He discussed his passion for musicals — even connecting it to his study of neuroscience and the law.

And he explained how a kid from Philadelphia became an ardent fan of the New York Yankees.

After the Phillies choked in 1964, he decided to root for another team “so heartless, so soulless — so totally like corporate America — that if they lost, I wouldn’t care.”

Delivered with a twinkle, the quip was offered not as a put-down of corporations but rather as a sly parody of his perceived attitude toward them.

The son of a fertility doctor and a guidance counselor, Rakoff attended an elite public high school in Philadelphia and went on to Swarthmore — “a very liberal college,” he said — where he was editor of the newspaper and president of the student council.

He spent a summer working for the Congress of Racial Equality and was on the Mall in 1963 when Martin Luther King Jr. delivered his “I Have a Dream” speech.

At Oxford, he wrote a master’s thesis on Mohandas Gandhi, the leader of India’s independence movement whose nonviolent tactics helped inspire the civil rights movement in the United States.

But culturally, he stood apart from trends sweeping campuses in the 1960s. “I may be one of relatively few people from the ’60s who’s never even had any marijuana, haled or non-inhaled,” he said.

He led a conservative social life, he said, “secretly envying all those guys who seemed to be having a good time with free love.”

“But if I had ever gone down that road, I think I would have had a heart attack,” he said, citing his upbringing.

He explored a career in newspaper journalism but was put off by what he sensed as the cynicism of older reporters — a defeatist view that they could write all day about the truth but it wouldn’t make a difference.

He aspired to write stage musicals, and he started one on P.T. Barnum, the 19th-century circus impresario known — perhaps mistakenly — for saying, “There’s a sucker born every minute.” His plan was to work at a law firm during the day and write the great American musical at night, he said, but he discovered that the law firm required his days and his nights.

With great disappointment, he abandoned his theatrical dream. “I guess what I really realized was, if you’re going to be good at something, you have to give it your total attention,” he said.

He left a prominent firm to join the U.S. attorney’s office in Manhattan in 1973 and eventually led its business and securities fraud unit.

The first trial Rakoff prosecuted was one of the greatest learning experiences of his career, he said, “because I did everything wrong.”

When the defendant unexpectedly took the stand, Rakoff took his cue from television’s Perry Mason and tried to bludgeon him into confessing. “I went at this guy hammer and tongs. And I was sarcastic, and I was bombastic. . . . The net result of all this was, the jury began to hate me. In hindsight, I think they were 100 percent right. And, I mean, here was this little twerp acting like a bully but having nothing to back it up with.”

It was the last trial he lost as a prosecutor, Rakoff said.

A more experienced prosecutor gave him some advice: The government has to come across as the good guy — polite and never arrogant. “That means treating even someone whom you’re out to destroy as a human being deserving of respect,” Rakoff recounted.

Largely to boost his income, in 1980 Rakoff jumped to a corporate law firm. He joined Mudge Rose in New York at a time when it was unusual for such firms to have criminal-defense practices. It was a prescient move: White-collar defense was about to become a growth industry.

Rakoff’s representation of Martin Siegel, a high-level investment banker who sold inside information to legendary fraudster Ivan Boesky, put him in the thick of one of the biggest legal dramas to hit Wall Street.

The case against Siegel was very strong, Rakoff said, but “there was a human being here who had to be salvaged because he was not an evil man.”

Siegel pleaded guilty, cooperated with the government, served two months in prison and returned to a waterfront mansion in Florida.

Criminal defense work had its challenges — not least, defending criminals. “It’s very hard to uphold individual liberty when the person you’re representing is often a crook,” Rakoff said.

Some judges simply refused to treat the bad guys fairly, and some people couldn’t understand why he would defend them, he said.

There was another frustration: The lawyer has an obligation to take the positions that are most favorable to the client. “After a while, you sort of hunger for the opportunity to not only be making the decision but in effect say what you think within the bounds of what the law provides,” he said.

Rakoff satirized the sentiment in lyrics for the Courthouse Follies, a private holiday show for employees of the courthouse on New York’s Foley Square:

Don’t just be a lawyer,

It’s nothing but drudge;

You’ll feel more self-important

If you get to be a judge. . . .

You can’t become a doctor, you would wind up a quack,

You can’t become a porn star, you’re no good in the sack,

But you can be a judge because you’re such a big hack.

After saving enough money to return to the government payroll, Rakoff aimed for a seat on the bench. He applied to a committee that screened judicial candidates on behalf of Democrat Daniel Patrick Moynihan, then senior senator from New York and a key gatekeeper in the appointment process. Moynihan had been ambassador to India and was intimately familiar with the subject of Rakoff’s Oxford thesis, the judge recalled. The job interview turned into a discussion of Indian history, Rakoff said, and at the end Moynihan backed him.

President Bill Clinton nominated him, and Rakoff got word that he had been confirmed by the Senate while on a family ski vacation in Colorado. Since becoming a judge in 1996, he has made a mark on subjects as varied as the WorldCom accounting fraud and the FBI’s suspected abuse of a lie-detector test in the aftermath of 9/11.

Supporting a Freedom of Information Act request by the Associated Press, Rakoff ordered the government to release information about prisoners held at Guantanamo Bay, Cuba.

His reputation for cross-examining lawyers and his widely acknowledged intellect lead them to prepare anxiously for appearances before him. One boiled it down to this: “He thinks he’s the smartest guy in the court, and in almost every instance he’s right.”

Where some judges almost monastically avoid publicity, Rakoff is outspoken.

In a recent e-mail that began by reviewing his long-ago record as a prosecutor, he lamented that federal sentencing guidelines now put pressure on even innocent defendants to plead guilty, shifting power from judges to prosecutors.

“Worst of all, it means that virtually all federal criminal justice is conducted behind closed doors. That is because a trial is nearly the only place where the entire criminal justice system is put to the test of truth: Do you have the proof of guilt, or don’t you?”

In a follow-up, he said, “And, to state the obvious, a system of justice that chiefly operates behind closed doors will sooner or later be a system that . . . leads to abuse.”

It sounded a lot like his critique of the SEC.

* * *

When it comes to passing judgment on the SEC, the judge has repeatedly found cause to scold.

He issued a severe rebuke to the agency in a recent insider trading case against Rajat Gupta, a former McKinsey & Co. chief and Goldman Sachs board member. In so doing, he sided with Gupta defense lawyer Gary Naftalis, a fellow veteran of the U.S. attorney’s office in Manhattan whom the judge described as a close friend. One of Naftalis’s sons clerked for Rakoff, and Rakoff officiated at the son’s wedding.

The case spotlighted Rakoff’s membership in the old boys’ network.

The judge said he never recuses himself when he happens to be close to one of the lawyers in a case. “When I put on the robe and go up on the bench, I could care less whether it’s my best friend or my worst enemy,” he said.

Elaborating in an e-mail, Rakoff wrote, “Whenever any lawyer (close friend or just acquaintance) has a case before me, I cut off all social contact with that person throughout the duration of the case.

“Thus, for example, I have not had any out-of-court contact whatsoever with Gary Naftalis for over a year (since when his initial Gupta matter came before me).”

In 2009, he refused to go along with a settlement under which Bank of America would pay a $33 million fine, prompting the two sides to renegotiate for $150 million. He denounced the original deal as “a contrivance designed to provide the S.E.C. with the facade of enforcement.”

In early 2011, he grudgingly accepted an SEC settlement with a semiconductor company while mocking the neither-admits-nor-denies provision. “The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C.,” he wrote.

But in a civil insider trading case involving hedge fund mogul Raj Rajaratnam, Rakoff sided with the SEC, arguing that it should have access to FBI wiretap evidence gathered in a related criminal probe. For that decision, an appeals court issued an extraordinary slap-down order known as a writ of mandamus, saying, in effect, that Rakoff had gone off the reservation.

Now, the SEC is seeking a similar writ against Rakoff, saying he went too far when he rejected the Citigroup settlement.

If the agency had to hold out for admissions of wrongdoing, the SEC says, defendants would refuse to settle, and the agency would be pinned down in court litigating and potentially losing its battles.

Rakoff is unmoved.

The SEC’s approach, he wrote, is “hallowed by history, but not by reason.” The proposed settlement “still leaves the defrauded investors substantially short-changed” — they lost more than $700 million — and it asks the court to impose sanctions based on “mere allegations,” he said in his November opinion.

Ralph C. Ferrara, who worked with Rakoff at the Justice Department, served as general counsel of the SEC and now defends clients in SEC cases, views Rakoff’s action as remarkable from either side of the debate.

“On the one hand, Judge Rakoff . . . has finally pronounced that the king has no clothes, and for the first time the world seems to be noticing the nakedness of the SEC on this issue,” Ferrara said. “On the other hand, one could say, ‘Look, Judge Rakoff has engaged in almost, in an unconstitutional encroachment.’”

Rakoff’s legacy on the issue is now in the hands of an appeals court. He’s been knocked down before — notably, when he ruled that the death penalty “is tantamount to foreseeable, state-sponsored murder of innocent human beings.”

The judge said he still believes he was right about that, and in his chambers hangs an oversize copy of a newspaper article about his ruling.

“If you’re never reversed on appeal,” he said, “you probably have taken too narrow a view of the law.”