A recent decision by the 2nd Circuit Court of Appeals has concluded that the SEC’s decision to settle an enforcement action is entitled to “significant deference.” In this case, which arose from an investigation by the SEC into Citigroup Capital Markets’ sale of collateralized debt obligations, Judge Jed Rakoff had refused to approve a settlement between the Commission and Citigroup. As we earlier reported, Judge Rakoff had asserted that he was unable to approve the settlement, largely because Citigroup had not admitted liability in the case and the parties has submitted little or no evidence as to what had actually occurred. In addition, Judge Rakoff compared the settlement unfavorably to settlements that the SEC had obtained in similar cases against other investment banks. In legal terms, Judge Rakoff stated that he was unable to determine that the settlement was “fair, reasonable, adequate and in the public interest.”
While the SEC has recently taken steps to require parties to admit to conduct in some settled enforcement matters, the practice of “neither admitting nor denying” the SEC’s allegations has been commonplace and accepted practice for a long period of time. Judge Rakoff’s views, if widely accepted in other courts, likely would have made it much more difficult for the SEC to settle cases and might have incentivized it to bring more cases administratively.
The 2nd Circuit concluded, however, that trial judges have very limited discretion to not agree to settlements in SEC actions. Specifically, the Court stated that a trial judge should determine whether the settlement is “fair and reasonable” and that it would not “disserve” the public interest. The Court further stated that the trial judge need not determine the “truth” of the allegations in the Commission’s complaint and that the trial judge owes “significant deference” to the SEC’s conclusion that the proposed settlement is in the public interest.
While the differences in wording between the trial judge’s and appellate court’s standards may seem relatively minor, it is important to note that the 2nd Circuit’s opinion largely affirms that the SEC and an accused party may settle without the accused party admitting liability or even conceding the facts in the SEC’s complaint. Indeed, as the 2nd Circuit clearly stated, “[i]n many cases, setting out the colorable claims, supported by factual averments by the S.E.C., neither admitted nor denied by the wrongdoer, will suffice to allow the district court to conduct its review.”