In a long-awaited decision, a federal appeals court in New York today vacated a district court judge‟s decision rejecting a proposed settlement of the Securities and Exchange Commission‟s charges against Citigroup. The decision by the U.S. Court of Appeals for the Second Circuit in S.E.C. v. Citigroup Global Mkts., Inc., Case No. 11-5227 (June 4, 2014) strongly affirms the SEC‟s discretion in bringing and settling enforcement actions.

District Judge Jed Rakoff in 2011 rejected the proposed settlement and consent decree as “neither fair, nor reasonable, nor adequate, nor in the public interest.”  He criticized the proposed settlement because it did not require Citigroup to admit the SEC‟s factual allegations against it.  His decision challenged the widespread SEC practice of settling cases on a “no-admit/no-deny” basis, which he described as “hallowed by history, but not by reason.”

Today, however, the Second Circuit vacated Judge Rakoff‟s decision as an abuse of discretion because he applied an incorrect legal standard that did not give sufficient deference to the SEC‟s judgment. The court stated: “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. Trials are primarily about the truth. Consent decrees are primarily about pragmatism.”

While the Second Circuit acknowledged that a district court must consider the public interest when evaluating a proposed consent decree that includes injunctive relief, it went on to instruct that a district court may not “find the public interest disserved based on its disagreement with the S.E.C.‟s decisions on discretionary matters of policy, such as deciding to settle without requiring an admission of liability,” or because it disagreed with the specific charges that the SEC levied.

In clarifying the standard a district court should apply, the Second Circuit expressly rejected a requirement that the consent decree be “adequate.”  The Court stated that the adequacy requirement appeared to have been borrowed from the standard for review of class action settlements. While the requirement is appropriate in that context, where absent class members need the court‟s protection, the court reasoned that a consent decree does not present the same adequacy concerns. Rather, in such circumstances, private plaintiffs may bring their own claims when permitted by law and, if there is no private right of action, the SEC represents the victims and “is politically liable if it fails to adequately perform its duties.”

The decision was issued unanimously by Judges Rosemary Pooler, Raymond Lohier, Jr., and Susan Carney. The court sent the case back to Judge Rakoff to reconsider the settlement in light of the standard that it articulated. Judge Lohier issued a concurring opinion, stating that (1) in cases involving only monetary relief, district courts should not consider whether the settlement disserves the public interest and should not reject consent decrees in such cases because of the “perceived modesty” of any monetary penalties and (2) he would have sent the case back to Judge Rakoff with direction to approve the settlement.

Today‟s decision does not mean that all SEC actions will be settled on a no-admit/no-deny basis. The SEC in 2012 and in 2013 announced that as a matter of its own policy, it would begin requiring admissions of facts in certain types of settlements. It has gone on to do that in some cases.  But, settlements without admissions remain common, and the SEC has sought to preserve its right to continue to settle cases in that way.

Judge Rakoff‟s highly publicized decision spurred widespread discussion of the appropriateness of no- admit/no-deny settlements, including speculation that such a means of resolving enforcement actions could be sharply curtailed. This discussion was further encouraged by other federal court decisions exploring the propriety of settlements with various government agencies and by the SEC‟s own policy changes to require admissions of wrongdoing in certain situations. Today‟s decision, however, clarifies that, while the SEC may have the power to seek admissions of wrongdoing and is doing so more often than in the past, the decision of whether to require those admissions is within the SEC‟s discretion.