2nd Circuit Vacates Rakoff Decision Regarding Liability Admissions; Clarifies Standard of Review for SEC Consent Decrees
In a much anticipated decision on June 4, 2014, the 2nd Circuit vacated U.S. District Judge Rakoff’s controversial rejection of a consent decree approving a $285 million settlement between the SEC and Citigroup, in which the bank neither admitted nor denied wrongdoing. In 2011, Judge Rakoff blocked the proposed consent decree, ruling that the SEC policy of allowing parties to settle enforcement actions without admitting or denying liability undermined the court’s ability to assess whether the settlement was fair.
In a ruling viewed as a rebuke to Rakoff, the 2nd Circuit emphasized that the SEC—not the courts—has the authority to decide the terms of a settlement agreement. Noting that the SEC’s resources are limited and that consent decrees are a legitimate means of enforcement, the 2nd Circuit observed: “Trials are primarily about truth. Consent decrees are primarily about pragmatism.” The 2nd Circuit explained that there was “no basis in the law” for district courts to require admissions in proposed SEC settlements.
The 2nd Circuit clarified that that the proper standard is whether an SEC settlement is “fair and reasonable” and outlined the relevant considerations:
- the basic legality of the decree;
- whether the terms of the decree, including its enforcement mechanism, are clear;
- whether the consent decree reflects a resolution of the actual claims in the complaint;
- whether the consent decree is tainted by improper collusion or corruption between the SEC and the defendant; and
- whether the public interest would not be disserved (if the deal contains an injunction).
Absent substantial grounds for finding that the consent decree does not satisfy these considerations, the district court is required to enter the order.
The ruling marks a victory for the SEC, and confirms that the agency has broad discretion to negotiate the terms of its settlements. In a statement, the SEC Division said it was "pleased" with the decision, stating: "While the SEC has and will continue to seek admissions in appropriate cases, settlements without admissions also enable regulatory agencies to serve the public interest by returning money to harmed investors more quickly, without the uncertainty and delay from litigation and without the need to expend additional agency resources."
As we previously reported, the SEC moved quickly to announce a new policy to require admissions of liability, after Judge Rakoff’s decision, in certain (probably high profile) cases. Now that the 2nd Circuit has reversed the underlying decision that triggered the SEC policy, the SEC may apply that policy even more sparingly than it has so far. At the very least, the SEC will not be able to insist on admissions on the ground that without an admission there is a risk that the district court would not approve the settlement.