Second Circuit’s Citigroup Decision Protects SEC’s Discretion in Settling Enforcement Cases

by Mintz Levin - Securities Matters

Wednesday’s decision by the U.S. Court of Appeals for the Second Circuit in the Citigroup case is significant because it clarifies the standards for judicial review of consent decrees in SEC enforcement proceedings and protects the discretion of the SEC to settle cases without requiring defendants to admit wrongdoing. The decision has garnered considerable attention because it vacates a 2011 order by federal district court judge Jed Rakoff, in which he rejected a proposed settlement and consent decree between the SEC and Citigroup Global Markets in a case involving marketing of mortgage-backed securities. See SEC v. Citigroup Global Mkts Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011).

The Second Circuit opinion makes it clear that district courts cannot simply second-guess the SEC’s choices on discretionary matters of policy, such as deciding to settle a case without requiring an admission of wrongdoing. The court held that the proper standard for reviewing a proposed consent judgment involving an enforcement agency is whether the decree is fair and reasonable and does not disserve the public interest. Judges must approve consent decrees proposed by the SEC absent a substantial basis in the record for concluding that the proposed decree does not meet these requirements. They should not assess a decree’s “adequacy,” and they must give significant deference to the SEC’s determination that a decree serves the public interest.

Although the SEC has begun to apply a new policy in the last year, requiring defendants to admit misconduct as a condition of settlement in egregious cases (as our colleague Nancy Adams discussed in her post earlier this week), for many years the SEC has permitted defendants to settle enforcement proceedings without admitting wrongdoing. Where the SEC sues in federal court and seeks to resolve the case through a consent decree, as in the Citigroup case, judicial review of such a settlement is required.

In rejecting the Citigroup consent decree, Judge Rakoff criticized “the S.E.C.’s long-standing policy – hallowed by history, but not by reason – of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations,” because it “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.” On the one hand, he expressed concern that “a consent judgment that does not involve any admissions and that results in only very modest penalties” is viewed as merely “a cost of doing business” (although in Citigroup the “cost of doing business” was $285 million in disgorged profits, penalties, and interest). On the other hand, he observed that “the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged is patent.”

But the Second Circuit took the view that Judge Rakoff’s concern with establishing the facts was misplaced in this context: “Trials are primarily about the truth. Consent decrees are primarily about pragmatism,” the Second Circuit observed, noting that in settlements each party seeks compromise in an effort to manage risk. Therefore “[i]t is an abuse of discretion to require, as the district court did here, that the S.E.C. establish the ‘truth’ of the allegations against a settling party as a condition for approving consent decrees.”

Courts must of course review SEC consent decrees. The Second Circuit said that in determining whether a decree is fair and reasonable, a court should assess the decree’s legality; whether its terms and enforcement mechanism are clear; whether it reflects resolution of the actual claims in the complaint; and whether it is tainted by improper collusion or corruption. But the primary focus of any additional inquiry should be on whether the decree is procedurally proper.

Notwithstanding its new “get tough” policy in some cases, the SEC has welcomed the Second Circuit decision, because settlements in which a defendant neither admits nor denies wrongdoing enable the agency to take action without the delay, uncertainty, and resources involved in extended litigation, as Director of Enforcement Andrew Ceresney noted in a statement. And the decision also provides reassurance to defense counsel that they can negotiate a settlement of a court case with the SEC with less concern that it may be potentially rejected by the court.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Mintz Levin - Securities Matters | Attorney Advertising

Written by:

Mintz Levin - Securities Matters

Mintz Levin - Securities Matters on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.