On June 4, 2014, the Second Circuit issued a 28-page ruling holding that U.S. District Court Judge Jed Rakoff had “abused” his discretion by rejecting a $285 million U.S. Securities and Exchange Commission (“SEC”) settlement with Citigroup, Inc. because the bank neither admitted nor denied wrongdoing. The 2011 decision led to increased criticism of the SEC’s use of settlement agreements in which defendants neither admitted nor denied the government’s allegations of wrongdoing, and heightened scrutiny by some judges who were asked to approve such settlements. The case concerns the SEC’s settlement with Citigroup of allegations that the bank had not properly disclosed to investors matters relating to a $1 billion collateralized debt obligation. In his November 2011 decision rejecting the settlement, Judge Rakoff said the SEC’s policy allowing “no-admit, no-deny” settlements had turned his court into “a mere handmaiden” to the SEC’s enforcement policies, and that he was unable to determine whether the agency’s settlement was “fair, reasonable, adequate and in the public interest” because the agency had alleged, but not proved, that Citigroup engaged in wrongdoing. The Second Circuit, noting the deference courts must give to agency decisions, held that it is not appropriate for courts to scrutinize the “adequacy” of SEC settlements, and that there was “no basis in the law” for a district court to require admissions of wrongdoing in SEC settlements. The Second Circuit ruling provides much needed guidance regarding the court’s role in approving agency settlements.
Read more: New York Times: ”Appeals Court Overturns Decision to Reject S.E.C.-Citigroup Settlement“; Law360: “2nd Circuit Rakoff Decision Nixing SEC-Citgroup ‘No-Admit” Pact”