I recently wrote about Judge Rakoff’s refusal to enter the SEC’s proposed consent decree in SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (SDNY 2011) – and the shift in SEC enforcement policy that it prompted. Burr blog here, (April 17, 2014); Law360 Securities article here, (June 2, 2014).
On June 4, the Second Circuit reversed the Citi ruling, holding the District Court “abused its discretion by applying an incorrect legal standard.” United States Securities & Exchange Comm’n v. Citigroup Global Markets, Inc., Nos. 11-5227-cv(L); 11-5375-cv(con); 11-5242-cv(xap)(2nd Cir. June 4, 2014)(Slip op. at 4, vacating and remanding).
The Court held interlocutory jurisdiction appropriate under 28 U.S.C. § 1292(a)(1) where (1) refusal to enter a consent decree or approve a settlement “effectively denied …injunctive relief” and (2) without an interlocutory appeal a party will suffer irreparable harm – met here by the District Court’s unwillingness to further consider settlement and order forcing the parties to trial. Id. at 12-16.
A District Court must approve an enforcement agency’s proposed consent judgment if it is “fair and reasonable, with the additional requirement that the ‘public interest would not be disserved’ …[as to any] injunctive relief.” Id. at 19. The “fair and reasonable” inquiry includes assessment of at least: (1) basic legality; (2) clarity of terms; (3) actual resolution of complaint’s claims; (4) freedom from collusion or corruption. Id. at 20.
The Court observed: “Trials are primarily about the truth. Consent decrees are primarily about pragmatism.” Id. at 21. Consent decrees are “a means to manage risk.” Id. Thus, the public-interest issue is subject to Chevron deference to political branch, here the SEC. Id. at 24-25. “What the district court may not do is find the public interest disserved based on its disagreement with the S.E.C.’s decision on discretionary matters of policy, such as deciding to settle without requiring an admission of liability.” Id. at 26. The Court also noted that a finding of disservice requires substantial record evidence. Id. at 20.
As most observers expected, the Second Circuit rejected Judge Rakoff’s bid to expand judicial review of consent decrees. By requiring Chevron deference to the political-branch’s policy determinations, the Circuit struck the right balance, consistent with its “real-world” observation that trials are about truth while consent decrees are about pragmatic risk management. In the end, though, Judge Rakoff provoked the wide policy discussion he (no doubt) sought – and arguably prompted the SEC’s adoption of its new “admissions” policy.