In a much anticipated decision, on June 4 the Second Circuit vacated District Court Judge Rakoff’s rejection of a consent judgment approving a $285 million settlement between the U.S. Securities and Exchange Commission (SEC) and Citigroup. In 2011, the SEC alleged that Citigroup created and sold mortgage bond investments without disclosing that the people assembling the deal were betting against the performance of the securities. In November 2011, Rakoff blocked the proposed consent judgment because the settlement allowed Citigroup to neither admit nor deny the SEC’s allegations. Although the “no admit, no deny” policy is common practice in the SEC’s settlement agreements, Rakoff objected to the practice because, he said, it denied courts the ability to assess whether a settlement was fair.

In a decision largely seen as a rebuke to Rakoff, the Second Circuit emphasized that it is the SEC, not the courts, that has the authority to decide the terms of an agreement. Acknowledging that the agency’s resources are limited and that consent decrees are a legitimate means of enforcement, the court stated, “Trials are primarily about truth. Consent decrees are primarily about pragmatism.”

On remand, Judge Rakoff will have less leeway to review the settlement. The Second Circuit held that a district court’s responsibility is to assess whether the settlement is “fair and reasonable.” In doing so, the Second Circuit 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 a substantial basis in the record for concluding that the proposed consent decree does not meet these requirements, the district court is required to enter the order. Once a determination of fair and reasonable is made, the review ends.

The case now returns to Rakoff’s desk, where the consent decree most certainly will be approved.

In June 2013, the SEC announced a new policy that it would require defendants to make admissions in certain cases, such as in cases with a large market impact or which involve egregious misconduct. Since that announcement was made, the SEC has required defendants to make admissions in a handful of high-profile settlements. Nonetheless, it has long been presumed that the SEC has great control over the terms of its settlement agreements, including whether a defendant must admit or deny allegations, and on June 4, the Second Circuit affirmed this presumption.