In a preliminary opinion handed down yesterday, the US Court of Appeals (2nd Circuit) granted the SEC’s application for a stay of district court proceedings, pending resolution of interlocutory appeals and/or its petition for mandamus.  Although the appeals are still to be considered on their merits, the opinion is written in pretty trenchant terms:  

“We have no reason to doubt the S.E.C.’s representation that the settlement it reached is in the public interest. We see no bases for any contention that the S.E.C.’s decision to enter into the settlement was ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law’.  Nor do we find reason to doubt that the stay the S.E.C. seeks, so as to prosecute its challenge to the district court’s disallowance of the settlement, is also in the public interest“.

In November last year, Rakoff, J. had refused to approve a proposed judgment by consent between the SEC and Citigroup, because the settlement was being made without admission or denial of the SEC’s allegations.  In the Judge’s view, the proposed consent judgment was bad policy and failed to serve the public interest because defrauded investors could not then use the judgment to establish the firm’s liability in civil suits to recover the investors’ losses.  

This, the Court of Appeals has now suggested, appeared to overlook the possibilities (i) that the firm might well not consent to settle on a basis that required it to admit liability, (ii) that the SEC might fail to win a judgment at trial, and (iii) that the firm perhaps did not mislead investors.  More significantly, Rakoff, J. did not appear to have given deference to the SEC’s judgment on matters of policy that were wholly within its discretion.  

Rakoff, J. had also reasoned  that the settlement must be deemed to be either insufficiently onerous or excessively onerous unless the liability of the firm had been either proved or disproved at trial or one side or the other had conceded the issue.  The Court of Appeals considered this to be tantamount to ruling that a court would not approve a settlement that represents a compromise: “We doubt whether it lies within a court’s proper discretion to reject a settlement on the basis that liability has not been conclusively determined”.  

In conclusion, the Court of Appeals said it satisfied that:

  • there was a strong likelihood that the SEC and the firm would be successful in setting aside the district court’s rejection of their settlement;
  • that the grant of a stay was justified because the parties had shown serious, perhaps irreparable, harm;
  • the stay would not substantially injure any other persons interested in the proceeding; and
  • giving due deference to the SEC’s assessment of the importance of its settlement to the public interest, that interest would not harmed by the grant of a stay.

Although the outcome of the appeals is yet to be determined on the merits, the views expressed in the preliminary opinion strongly suggest that the SEC’s overall policy of settling cases on the basis that liability is not admitted or denied is unlikely to be significantly eroded by the judiciary – at least not by the US Court of Appeals (2nd Circuit):  

“While we are not certain we would go so far as to hold that under no circumstances may courts review an agency decision to settle, the scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal.”  

The opinion can be obtained from PACERSEC v. Citigroup Global Markets Inc, case No. 11-5227, in the 2nd U.S. Circuit Court of Appeals.