ANALYSIS-US judges put feet down, stomp regulatory accords

* Judges refuse to approve three US settlements

* Public perception, economy, fairness drive rulings

* "Rubber stamp" not acceptable

By Jonathan Stempel

NEW YORK (Reuters) - Federal investigators don't try to bring wrongdoers to justice by concocting "half-baked," "sweetheart" deals in search of a judicial "rubber stamp."

But in the last year, U.S. judges have accused regulators of doing just that, as they attacked settlements of probes into three big lenders: Bank of America Corp last September, and Citigroup Inc and Barclays Plc this week.

Such criticism can be viewed as blows to the U.S. Securities and Exchange Commission, which struck the first two settlements, and the U.S. Department of Justice, responsible for the Barclays accord.

Yet the criticism may also reflect a growing demand by the public that responsible parties be brought to bear, as concern grows that a sputtering recovery from the worst economic crisis in decades might flame out.

"It's obvious why this is happening," said Elizabeth Nowicki, an associate professor at Tulane University Law School and former SEC lawyer. "More attention is focused on the egregious nature of issues regarding financial fraud and improper business dealings. Due to the economy, we're seeing more of this on the front pages. It's not that judges weren't doing their jobs before, but judges are people too."

The inability of the government to hold top executives accountable -- unlike in the accounting scandals that once enveloped Enron Corp and WorldCom Inc -- may also be a factor.

"Judges and the public are upset that we are two years past the financial crisis, and we cannot identify a single financial executive who has been prosecuted" successfully, said John Coffee, a professor at Columbia Law School. "That may be where the tide is shifting, toward a greater need for regulators to at least place some of the costs on individuals. It gives you much greater deterrence."

NO RUBBER STAMP

At a Tuesday hearing, U.S. District Judge Emmet Sullivan called Barclays' agreement to pay $298 million to resolve criminal charges that it violated trade sanctions by dealing with banks in Cuba, Iran, Libya, Myanmar and Sudan a "sweetheart deal."

The judge set another hearing for Wednesday, but not before questioning why the British bank should get a "deferred prosecution" agreement when an ordinary American who robs a bank would not. "That should concern the government," he said.

A day earlier, U.S. District Judge Ellen Segal Huvelle at a hearing refused to approve the SEC's $75 million accord with Citigroup to resolve civil charges that the bank -- prior to getting a series of federal bailouts -- understated its exposure to subprime mortgages by about $40 billion in 2007.

"Why would I find this fair and reasonable?" Huvelle said, as reported by The Wall Street Journal. "You expect the court to rubber-stamp, but we can't." She also set another hearing.

Perhaps most memorably, U.S. District Judge Jed Rakoff last September rejected a $33 million SEC accord over charges that Bank of America hid $15.8 billion of losses and $3.6 billion of bonuses at Merrill Lynch & Co, which it was acquiring.

He called that a "contrivance" to let the SEC expose wrongdoing and the bank claim it was coerced into settling, at the expense of shareholders and the truth. He later approved a $150 million accord, but called even that "half-baked justice at best."

To be sure, not all settlements endure such judicial skepticism. Case in point: the SEC's $550 million accord last month with Goldman Sachs Group Inc, which won quick approval. A Goldman vice president still faces civil charges.

Yet in connection with these settlements, just two top executives have been punished and both, from Citigroup, agreed to pay just $180,000 combined. The end result to some: shareholders appear to be paying for the faults of management.

Moreover, relative to the banks' sizes, the fines are, for the most part, small.

"It makes the violation a cost of doing business: we'll skirt to the edge of the law, and if we get caught, we'll pay, and if we don't, we'll make money," said Peter Henning, a law professor at Wayne State University in Detroit. "I don't think companies think that, but it turns fines into an economic decision rather than a means of deterrence."

SIGN -- WHEN READY

There remains a risk that parties may resist settling if regulators play hardball in settlement talks. "It will make it harder to negotiate a settlement, but it will make a settlement meaningful rather than meaningless," Coffee said.

Nowicki took an opposite view, saying the alternative to settling for defendants could be worse.

"Judges who draw a line in the sand are helping the agencies," Nowicki said. "Defendants will realize the agencies are going to need to set the bar higher for settlements. Going to a jury, half of which might be unemployed, is most assuredly not a better option."

Henning said parties to settlements can boost their chances for approval by making clear what drove their decision-making. Even filing documents with the court under seal could help, he said, even if the public does not learn all the details.

"Judges don't want to be rubber stamps," Henning said. "Judges want transparency for the court, not 'sign here."' (Reporting by Jonathan Stempel in New York; Editing by Richard Chang)