On June 4, 2014, the United States Circuit Court for the Second Circuit endorsed the Securities and Exchange Commission's practice of settling enforcement cases on a "neither admit nor deny" basis. In its order issued in SEC v. Citigroup Global Markets, Inc., the Second Circuit vacated the decision of The United States District Court for the Southern District of New York, in which Judge Jed S. Rakoff refused to approve a negotiated consent decree between the SEC and Citigroup Global Markets, Inc. ("Citigroup").[1] The Second Circuit decision represents a win for both Citigroup and the SEC because it makes it easier for defendants to settle cases without an admission of liability and also affirms the SEC's longstanding practice of settling cases without admitting or denying the truthfulness of the allegations.

Background of the Case

On October 19, 2011, the SEC filed a complaint alleging that Citigroup had negligently misrepresented the terms of mortgaged-back securities it had marketed in violation of Section 17(a)(2) and (3) of the Securities Act of 1933. Citigroup denied any wrongdoing. Concurrently, the SEC filed a proposed consent decree imposing, among other things, an injunction and a civil money penalty on Citigroup. The terms of the settlement agreement allowed Citigroup to enter into the settlement without admitting or denying the factual allegations brought by the SEC.

Judge Rakoff issued an order rejecting the settlement and mandated that a prompt trial be held. Judge Rakoff said that the SEC settlement was "neither reasonable, nor fair, nor adequate, nor in the public interest." Additionally, since Citigroup did not admit to the SEC's allegations, Judge Rakoff stated that the lack of "any proven or admitted facts" deprived the court of the facts that were essential to decide whether the punishment was adequate. Judge Rakoff believed that "it was bad policy, which disserved the public interest, for the SEC to allow Citigroup to settle on terms that did not establish its liability."

Summary of Decision

The Second Circuit, however, disagreed with the district court. In its June 4 Order, the Second Circuit clarified the proper standard for the review of a proposed consent decree involving an enforcement agency. This standard "requires that the district court determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the 'public interest would not be disserved,' in the event that the consent decree includes injunctive relief." The Court specifically excluded any inquiry of "adequacy" from the analysis as inappropriate in the judicial determination of a consent decree involving an enforcement agency. The opinion laid out four factors that must be considered in determining if a consent decree would satisfy the "fairness and reasonableness" standard: (1) the basic legality of the decree, (2) whether the terms of the decree, including its enforcement mechanism, are clear, (3) whether the consent decree reflects a resolution of the actual claims in the complaint, and (4) whether the consent decree is tainted by improper collusion or corruption of some kind.

Notably, the Second Circuit cautioned the district court that "[t]he primary focus of the inquiry … should be on ensuring the consent decree is procedurally proper, using objective measures … taking care not to infringe on the S.E.C.'s discretionary authority to settle on a particular set of terms." Specifically, the Second Circuit rejected the district court's emphasis on the "overriding public interest in knowing the truth." According to the Second Circuit, "[t]rials are primarily about the truth … Consent decrees are primarily about pragmatism." The Second Circuit emphasized that "[t]he job of determining whether the proposed S.E.C. consent decree best serves the public interest … rests squarely with the S.E.C., and its decision merits significant deference."


The Second Circuit upheld and gave great deference to the SEC's policy decision to enter into consent decrees in which the alleged wrongdoer neither admits nor denies the factual allegations. However, in an apparent reaction to Judge Rakoff's decision, SEC Chairperson, Mary Jo White, had previously announced that the SEC was "to in certain cases be seeking admissions going forward," because "[p]ublic accountability in particular kinds of cases can be quite important and if we don't get (admissions), then we litigate them." It remains to be seen whether the SEC will revert to its previous policy of entering into "neither admit nor deny" settlements now that it has been endorsed by the Second Circuit, or if the SEC will indeed insist upon admissions. If the SEC does insist upon getting admissions, more enforcement cases may go to trial.