The crowd of reporters on hand when U.S. District Judge Jed Rakoff of Manhattan federal court grilled attorneys from the Securities and Exchange Commission and Citigroup last week about their proposed $285 million settlement -- not to the mention the spilled ink and megabytes on Rakoff's pointed questions about the settlement's fairness -- show the public has certainly taken an interest in the deal to resolve allegations Citi deceived investors in a mortgage-backed CDO vehicle. But the SEC is arguing that the public interest is not something Rakoff should -- or even can -- consider when deciding whether to approve the deal.

Jon Stempel and Grant McCool of Reuters picked up that point at the Nov. 9 hearing. As their story reported, Rakoff asked the SEC's chief litigation counsel, Matthew Martens, whether he was arguing that it's not the court's role to consider whether the settlement serves the public interest.

"Am I correctly summarizing your position?" Rakoff asked, according to Reuters.

"Yes, your honor," Martens said.

"An interesting position," Rakoff then responded. "I'm supposed to exercise my power but not my judgment."

An interesting position and an interesting question. Rakoff may have bristled at the suggestion he can't consider whether the settlement is in the best interest of the citizenry, but the SEC's brief asking the judge to approve the deal supported its argument with a 1984 ruling by the U.S. Court of Appeals for the Ninth Circuit.

The case, SEC v. Randolph, involved stakes quite a bit lower than those in the Citi case: Two individual defendants were accused of reaping less than $125,000 in ill-gotten insider-trader profits. But the appellate court's six-page opinion, which reversed a trial court's rejection of the SEC's settlement with the accused inside-traders, does contain a money quote on the question of the public's interest. "As the agency given the responsibility of administering securities laws, the SEC ought to always be required to serve the public interest," the Ninth Circuit wrote. "That does not mean, however, the district court should have conditioned approval of the consent decree on what it considered to be the public's best interest. Instead, the court should have deferred to the agency's decision that the decree is appropriate and simply ensured that the proposed judgment is reasonable."

Of course, the Ninth Circuit's musings aren't binding on Rakoff. Or he might throw the SEC's citation back at the agency and home in on the appeals court's "conditioned approval" language. Randolph can certainly be read to hold that the public's best interest may be part of a trial court's consideration of an SEC settlement as long as the decision to approve the deal isn't conditioned only on that issue.

In fact, the standard the SEC (not to mention Southern District precedent) argues Rakoff must apply in evaluating the Citi deal -- whether it's fair, adequate, and reasonable -- seem to require a judge to consider the public's interest when overseeing cases brought by a governmental regulatory body.

Steven Korotash of K&L Gates, a former associate director of the SEC's enforcement division, noted the difficulty in separating the public-interest analysis from any examination of the fairness and reasonableness of the settlement. "They're technically right in their assessment that the court isn't supposed to supplant its judgment for the executive branch," Korotash said. But whether the settlement is in the public interest is "subsumed in the analysis of reasonableness where you have public agencies involved in the dispute," he added.

"It might not be spoken, but in reality there's no reason to enter judgment if it's not in public interest," Korotash said.

Rakoff has promised a written opinion in this one, though we doubt the public-interest question will make or break his approval of the deal. Considering Rakoff's opinion in his eventual acceptance of the $150 million Bank of America settlement provided the tasty soundbite "half-baked justice," it's worth looking out for what sort of legal quips he provides. It is hard to imagine this particular judge agreeing with the SEC that a government entity working on the public's behalf is the only party empowered to whether it's actually acting in the public's interest.

The SEC's Martens did not immediately return a request for comment. Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison, who is representing Citigroup, was not immediately available for comment.

(Reporting by Erin Geiger Smith)

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