The long legal battle over the SEC’s neither-admit-nor-deny settlement policy has finally come to an end. On June 4, 2014, the Second Circuit issued an opinion vacating the district court’s rejection of a proposed consent decree the SEC and Citigroup Global Markets, Inc. (“Citigroup”) had submitted for court approval as part of a proposed settlement of an SEC enforcement proceeding. The case arises from an October 2011 complaint in which the SEC alleged that Citigroup violated the antifraud provisions of the federal securities laws in its structuring and marketing of a 2007 collateralized debt obligation. 

Shortly after the case was filed, the SEC and Citigroup submitted a proposed consent judgment in which Citigroup agreed to pay disgorgement and a large civil penalty, and submit to injunctive relief. Notably, the consent judgment did not contain any admission of liability, but instead required that Citigroup would neither admit the allegations in the complaint, nor deny them, unless required to do so in testimony or in unrelated litigation. This neither-admit-nor-deny settlement language, which grew out of a 1972 administrative rulemaking, has been a standard feature of settlements with the SEC for decades.

Enter Jed Rakoff.

When the Citigroup consent judgment was submitted for approval in the Southern District of New York, it was assigned to the docket of Judge Jed Rakoff. Judge Rakoff, who has become something of a cult hero for his strong positions in cases related to the financial crisis, challenged the SEC to demonstrate that the proposed judgment was fair, reasonable, adequate, and in the public interest. In particular, the court asked how it could enter an injunction where there had been no admission of wrongdoing or evidentiary record supporting the allegations in the complaint:

before a court may employ its injunctive and contempt powers in support of an administrative settlement, it is equired, even after giving substantial deference to the views of the administrative agency, to be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.

S.E.C. v. Citigroup Global Markets Inc., 827 F. Supp. 2d 332 (S.D.N.Y. 2011). Judge Rakoff ultimately refused to approve the judgment, finding the court would not become “a mere handmaiden to a settlement privately negotiated on the basis of unknown facts.” Id.

The rejection of the proposed Citigroup judgment sent tremors through the SEC enforcement practice area, calling into question the Commission’s ability to execute settlements. Some other federal judges, following the lead of Judge Rakoff, also began to scrutinize the SEC’s no-admission settlement policy.

After the district court’s rejection of the consent judgment, both the SEC and Citigroup filed notices of appeal, and the SEC petitioned the Second Circuit for an emergency stay. The appellate court granted a stay, finding the SEC had demonstrated a “strong likelihood of success” on the merits. The Second Circuit also took the uncommon step of ordering that special pro bono counsel be appointed to advocate for the district court’s position since both parties in the underlying action supported the entry of the consent judgment.

In its decision, the Second Circuit found Judge Rakoff abused his discretion by requiring that there be a finding as to the “truth” of the underlying allegations in a complaint as a condition for approving a consent decree. “Trials are primarily about the truth. Consent decrees are primarily about pragmatism.” Opin. at 21. The court noted, “Consent decrees provide parties with a means to manage risk.” Id.

The Second Circuit clarified the standard for reviewing proposed consent judgments involving an enforcement agency. In such cases, a district court need only determine that the proposed decree is “fair and reasonable,” and that the “public interest would not be disserved” with its entry. Id. at 19. Most significantly, the Second Circuit held that, “[a]bsent 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.” Id. (emphasis added)

In remanding the case for further proceedings, including a determination of whether the public interest would be disserved through entry of the consent judgment, the circuit court emphasized the deference that district court judges should afford to the policy decisions of federal agencies. “Federal judges—who have no constituency—have a duty to respect legitimate policy choices made by those who do.” Id. at 25 (citing Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 866 (1984)). “The job of determining whether the proposed SEC consent decree best serves the public interest… rests squarely with the SEC.” Id. at 24

This long-awaited opinion should resolve much of the uncertainty that has surrounded court approval of SEC settlements since the decision of Judge Rakoff in Citigroup. But in the end, Judge Rakoff may have the last laugh, as recent comments from SEC Chair Mary Jo White and Senior Enforcement Staff suggest the Commission’s new enthusiasm for seeking admissions as a condition of settlement in a wide range of cases will continue to increase.