In SEC v. Citigroup Global Markets, Inc., 2014 WL 2486793 (2d Cir. June 4, 2014), the U.S. Court of Appeals for the Second Circuit has reversed and vacated U.S. District Court Judge Jed Rakoff’s controversial 2011 decision refusing to approve a consensual settlement agreement between the SEC and Citigroup Global Markets, Inc. While Judge Rakoff did not require an admission of wrongdoing as a condition of approval, he refused to approve the settlement because of its lack of detail on Citigroup’s alleged wrongdoing.
The key aspect of the Second Circuit’s ruling is the broad discretion it provides to the SEC in settling enforcement actions. While agency decisions ordinarily are reviewed on appeal under an “arbitrary and capricious” standard, the Second Circuit’s ruling confirms that it should be difficult to displace the SEC’s decision to enter a consent settlement agreement. The Court held that Judge Rakoff abused his discretion because his review authority is “restricted to assessing whether the settlement is fair, reasonable and adequate within the limitations Congress has imposed on the SEC to recover investor losses.” Id. at *6, citing SEC v. CR Intrinsic Investors, LLC, 939 F. Supp.2d 431, 434 (S.D.N.Y. 2013). That evaluation has, as its primary consideration, the perspective of the SEC in exercising its enforcement authority. This ties the standard of review most closely to the SEC’s institutional reasons for settling and makes those reasons the critical arbiter for settlement approval.
To that end, the Court specifically admonished that the district court’s role is not to establish the “truth” of the allegations made against a settling party. Rather, consent decrees are governed by pragmatic decision-making by the parties as opposed to jury rulings, which decide the truth or veracity in the contested litigation. “Consent decrees provide parties with a means to manage risk.” They result from a compromised mutual decision by the parties, one of whom is a governmental authority based on factors that are “uniquely for the litigants to make.” Id. at *8. According to the Court: “It is not within the district court's purview to demand cold, hard, solid facts, established either by admissions or by trials, as to the truth of the allegations in the complaint as a condition for approving a consent decree.” Id. at *8.
While the Court’s ruling is welcome news for the SEC in its enforcement efforts, it also is good news for parties entering consent decrees. If there is a sufficient factual record supporting the reasonableness of the consent decree from the SEC’s perspective and the decree does not disserve the public interest, the settlement should be approved without inquiry into the “truth” of the SEC’s allegations of liability or an admission of liability from the settling party. This decision will provide litigants with a greater sense of certainty and finality when entering into consent decrees with the SEC that the resolution they reached in agreeing to the settlement will go undisturbed by the courts.