Second Circuit Court Overturns Decision to Reject SEC-Citigroup Settlement (with Bondi and Isajiw Comment)

The U.S. Court of Appeals for the Second Circuit vacated the decision of the U.S. District Court for the Southern District of New York to reject a 2011 SEC settlement with Citigroup.

In November 2011, Judge Jed S. Rakoff rejected a settlement in which Citigroup neither admitted nor denied the SEC's allegations. Judge Rakoff criticized the SEC's use of a "neither admit nor deny settlement," holding that the Court did not have sufficient facts to determine whether the settlement was "fair, reasonable, adequate and in the public interest." He explained that "allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact."

The Second Circuit's opinion, written by Judge Rosemary Pooler, found that Judge Rakoff had "abused the court's discretion" by applying an incorrect legal standard when refusing to approve the settlement. The Court held that district courts must give "significant deference" to the SEC, explaining that "[t]he job of determining whether the proposed SEC consent decree best serves the public interest . . . rests squarely with the SEC. . . ." The Court of Appeals recognized that there is a "strong federal policy in favoring the approval and enforcement of consent decrees." A district court may not reject a proposed settlement "based on its disagreement with the SEC's decisions on discretionary matters of policy, such as deciding to settle without requiring an admission of liability."

Bondi and Isajiw Comment:The Second Circuit's decision should provide a significant level of comfort to parties negotiating settlements with the SEC. Approving "neither admit nor deny" settlements restores certainty to negotiations between defendants and the SEC by prohibiting district courts from requiring the SEC "to establish the 'truth' of the allegations against a settling party as a condition for approving consent decrees" and by requiring district courts to give "significant deference" to the SEC. Although the SEC Enforcement Division has gravitated toward requiring admissions on a more frequent basis, the Second Circuit's decision ensures that settlements reached between defendants and the SEC under the "neither admit nor deny" protocol will not be subject to undue judicial scrutiny. This ruling should facilitate dispute resolution with the SEC in a way that does not unnecessarily trigger the potentially negative collateral effects of admissions, such as raising the risks associated with subsequent private litigations.

See: United States Court of Appeals for the Second Circuit Court Opinion; U.S. District Court Southern District of New York Opinion (2011).Related news: Cadwalader Business Fraud Advisor: SEC's New Policy on Seeking Admissions in Settlements (July 3, 2013); SEC Chair White Speaks on Use of Civil and Criminal Actions to Police the Markets (with Lofchie Comment) (April 1, 2014); SEC Chair Delivers Lecture on the Importance of Trials to the Law and Public Accountability (November 15, 2013).