This post was also written by James C. Martin.
In SEC v. Citigroup Global Markets, Inc., 2014 WL 2486793 (2d Cir. June 4, 2014), the U.S. Court of Appeals for the Second Circuit has reversed and vacated U.S. District Court Judge Jed Rakoff’s controversial 2011 decision refusing to approve a consensual settlement agreement between the SEC and Citigroup Global Markets, Inc. While Judge Rakoff did not require an admission of wrongdoing as a condition of approval, he refused to approve the settlement because of its lack of detail on Citigroup’s alleged wrongdoing.
The key aspect of the Second Circuit’s ruling is the broad discretion it provides to the SEC in settling enforcement actions. While agency decisions ordinarily are reviewed on appeal under an “arbitrary and capricious” standard, the Second Circuit’s ruling confirms that it should be difficult to displace the SEC’s decision to enter a consent settlement agreement. The Court held that Judge Rakoff abused his discretion because his review authority is “restricted to assessing whether the settlement is fair, reasonable and adequate within the limitations Congress has imposed on the SEC to recover investor losses.” Id. at *6, citing SEC v. CR Intrinsic Investors, LLC, 939 F. Supp.2d 431, 434 (S.D.N.Y. 2013). That evaluation has, as its primary consideration, the perspective of the SEC in exercising its enforcement authority. This ties the standard of review most closely to the SEC’s institutional reasons for settling and makes those reasons the critical arbiter for settlement approval.
To that end, the Court specifically admonished that the district court’s role is not to establish the “truth” of the allegations made against a settling party. Rather, consent decrees are governed by pragmatic decision-making by the parties as opposed to jury rulings, which decide the truth or veracity in the contested litigation. “Consent decrees provide parties with a means to manage risk.” They result from a compromised mutual decision by the parties, one of whom is a governmental authority based on factors that are “uniquely for the litigants to make.” Id. at *8. According to the Court: “It is not within the district court’s purview to demand cold, hard, solid facts, established either by admissions or by trials, as to the truth of the allegations in the complaint as a condition for approving a consent decree.” Id. at *8.
While the Court’s ruling is welcome news for the SEC in its enforcement efforts, it also is good news for parties entering consent decrees. If there is a sufficient factual record supporting the reasonableness of the consent decree from the SEC’s perspective and the decree does not disserve the public interest, the settlement should be approved without inquiry into the “truth” of the SEC’s allegations of liability or an admission of liability from the settling party. This decision will provide litigants with a greater sense of certainty and finality when entering into consent decrees with the SEC that the resolution they reached in agreeing to the settlement will go undisturbed by the courts.
Michael E. Bleier joined Reed Smith after serving for nearly 14 years as General Counsel for Mellon Financial Corporation and Mellon Bank, NA, and as manager of legal affairs. Prior to joining Mellon in 1982, he was in the Legal Division of the Federal Reserve Board in Washington, D.C. for 11 years; when he left the Federal Reserve he was Assistant General Counsel, responsible for the bank holding company area. At Reed Smith he has counseled General Counsel clients; filed expansion applications with the Federal Reserve, the Comptroller of the Currency and the FDIC; and also advised financial-institution clients on an array of regulatory matters.
James C. Martin is a partner who has specialized in appellate law for more than 30 years. He is certified as a specialist in the area of Appellate Law by the State Bar of California Board of Legal Specialization. His experience spans a wide range of substantive areas including unfair competition, insurance recovery, coverage and bad faith, financial services, intellectual property, products liability, pharmaceutical and medical devices, and class actions.
Travis P. Nelson is a member of the Financial Industry Group, resident in the firm’s Princeton and Washington, D.C. offices. Mr. Nelson is a former Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department; a former Congressional staffer; and a frequent lecturer on financial services examination and enforcement issues. Mr. Nelson is a co-leader of the firm’s Financial Institutions Enforcement and Investigations Task Force, and regularly advises banks and money transmitters on compliance with BSA/AML issues.