On June 4, 2014, a three-judge panel of the Second Circuit Court of Appeals vacated a widely publicized 2011 decision by U.S. District Judge Jed Rakoff, which rejected a settlement between the U.S. Securities and Exchange Commission (“SEC”) and Citigroup C +0.84% Global Markets, Inc. (“Citigroup”). The settlement resolved allegations that Citigroup had misled investors in connection with the structuring and marketing of a fund holding assets that were linked to subprime securities. The settlement called for a civil penalty of $285 million but did not include admissions of fact or liability by Citigroup.
Judge Rakoff held that the settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest” chiefly because the parties did not give the court “a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards.” Without “some knowledge of  the underlying facts,” in Judge Rakoff’s opinion, “the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.” Following that decision, other federal judges closely scrutinized the terms of agreements in government civil enforcement actions and criminal investigations.
On appeal, the Second Circuit flatly rejected, as exceeding a federal court’s proper role, the nature and scope of judicial review articulated by Judge Rakoff. In the Second Circuit’s view, a district court’s task is limited almost entirely to deciding whether an enforcement agency’s settlement is “procedurally proper,” and a district court must “tak[e] care not to infringe on the S.E.C.’s discretionary authority to settle on a particular set of terms.”
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The Second Circuit cabined judicial review of agency settlements by narrowing, in three respects, the widely cited “fair, reasonable, adequate and in the public interest” standard. First, the Court completely removed “adequacy” from the test, observing that considerations of adequacy make sense in the context of class actions that preclude future claims. In contrast, SEC consent decrees either do not preclude private causes of action or, if the law does not provide for a private right of action, then the SEC is appropriately held “politically liable” if a settlement fails to provide investors adequate relief. In the Court’s view, it is not for a court to judge the adequacy of an SEC settlement.
Second, the Court confined the determination of “fairness and reasonableness” to the consideration of legality and procedure of the settlement, limiting the appropriate criteria to be considered to the following: (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.” The Court held that it was “uniquely” for the SEC, not the district court, to decide whether the facts justified going to trial, and to decide whether “pragmatism” warranted a settlement.
Third, the Court directed “significant deference” be given to the SEC’s determination of whether a settlement serves the public interest, emphasizing that “the job of determining whether the proposed S.E.C. consent decree best serves the public interest... rests squarely with the S.E.C.” In case any doubt remained as to a district court’s role, the Court observed that a district court may not “find the public interest is disserved based on [a] disagreement with the S.E.C.’s decisions on discretionary matters of policy, such as deciding to settle without requiring an admission of liability.”
In a sign of the decision’s immediate impact, shortly after the Second Circuit issued its opinion SDNY Judge Victor Marrero approved a $600 million settlement between the SEC and SAC Capital Advisors after having previously expressed reservations because the SEC had not insisted on admissions of liability by the defendant as a condition of settlement. In granting final approval, Judge Marrero stated that the court’s delay in issuing final approval had “served a purpose” by “call[ing] attention to the importance of more rigorous inquiry by the SEC in its application of ‘neither admit nor deny’ provisions in settlements... specifically those where parallel criminal cases track an SEC complaint arising from the same facts” – an apparent reference to a change in SEC settlement policy adopted after Judge Rakoff’s Citigroup opinion.
The Second Circuit’s decision, which delineates starkly separate powers between executive agencies and courts, will leave the SEC ample room to settle cases without court interference. It will be interesting to see whether, as contemplated by the Court, the SEC will be held “politically liable if it fails to adequately perform its duties,” whatever “political liab[ility]” means in this context.