SEC v. Citigroup: Court of Appeals Benchslaps Judge Rakoff's Refusal To Approve Settlement
In November 2011, Judge Jed Rakoff of the United States District Court for the Southern District of New York refused to approve a $285 million settlement of the SEC's charges against Citigroup regarding the marketing of subprime securities. The allegations in the case were that Citigroup had (1) selected the subprime securities to be included in fund, (2) falsely marketed the fund to its clients saying that the assets had been selected by an independent third party, and (3) then secretly shorted [bet against] the fund, reaping a profit of $160 million while its clients lost $700 million. Judge Rakoff refused to accept the settlement because for "failure to provide an adequate evidentiary basis" for the settlement. He held that asking a court to approve a consent decree without facts being proven at trial or by admission would reduce a court to a "mere handmaiden to a settlement." Judge Rakoff held, "An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous."
At the time, Judge Rakoff's decision rocked the financial world. The financial press understood that Judge Rakoff would not accept a settlement without an admission of liability by Citigroup. The New York Times analysis speculated that the decision "could lead to an end to the S.E.C.’s policy of settling its cases without any admission of liability by the defendant." In the wake of Judge Rakoff's decision, the SEC made a partial change in its policy on allowing a settlement without an admission of liability. SEC policy now requires an admission of liability to settle civil charges when at the same time the defendant admits to or has been convicted of criminal violations.
Today, the Second Circuit Court of Appeals reversed Judge Rakoff's decision in stinging terms. The key takeaways are:
1. A judge cannot require an admission of liability as a predicate for accepting a consent decree.
"There is no basis in the law for the district court to require an admission of liability as a condition for approving a settlement between the parties."
The Second Circuit made it clear that Judge Rakoff's attack upon a settlement without an admitted factual basis as "inherently dangerous" misstated the law. "The decision to require an admission of liability before entering a consent decree lies squarely with the SEC." [Strangely, the counsel who had been appointed to defend Judge Rakoff's decision in the Second Circuit had argued that Judge Rakoff "did not seek an admission of liability before approving the consent decree."]
2. The district court should not evaluate the "adequacy" of the settlement in determining whether to approve it. The determination of adequacy is left entirely to the SEC, which is "politically liable" if it fails to reach an adequate settlement.
"Adequacy" is not a factor that a reviewing court can consider in determining whether to approve an SEC settlement with a consent decree. The review is limited to whether the settlement is "fair and reasonable, with the additional requirement that 'the public interest would not be disserved.'"
3. " It is an abuse of discretion to require, as the district court did here, that the S.E.C. establish the “truth” of the allegations against a settling party as a condition for approving the consent decrees." The Second Circuit held that the reviewing court can glean the necessary factual basis to approve a consent decree from the affidavits submitted by the SEC, even if the defendant does not admit to the facts alleged therein.
The Second Circuit sent the case back to Judge Rakoff to implement the Second Circuit's decision. He will soon schedule a hearing to approve the settlement.