In SEC v. Citigroup Global Markets Inc.,___ F.3d __, no. 11-5227-cv (June 4, 2014) (“Citigroup II”), a three-judge panel of the Second Circuit affirmed the SEC’s ability to negotiate settlements without obtaining specific factual admissions from the settling defendants. The Court reasoned that there is a distinction between trials and settlement, observing that, “Trials are primarily about the truth. Consent decrees are primarily about pragmatism.” Id. at * 8. Specifically, Citigroup II found that the district court abused its discretion by requiring that, for a consent decree to be valid, the SEC must establish the truth of an allegation against a defendant. This decision, which reaffirmed that the SEC’s factual averments could be enough to support a consent decree, ended the uncertainty in the financial services industry engendered by SDNY’s Judge Rakoff with his 2011 decision to reject a $285 million consent judgment to resolve securities claims against Citigroup because the SEC had failed to provide any proven or acknowledged facts. See id. at *8; SEC v. Citigroup Global Markets, 827 F. Supp. 2d. 328, 332-333 (2011) (“Citigroup I”).
Judge Rakoff’s rejection of the Citigroup settlement had essentially repudiated the SEC’s “long standing policy…of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations.” Citigroup I, 827 F. Supp 2d. at 332. He held that that the SEC’s practice of settling cases without providing supported or proven facts was invalid in the context of consent judgments requiring injunctive relief. Id. His ruling created speculation that, going forward, settling defendants would have to admit fault in connection with regulatory settlements, a fact that could be used against them in other suits by private litigants. Indeed, in 2012, shortly after Citigroup I, the SEC enacted a new policy that required a settling defendant to make an admission of fraud or insider trading if they had been convicted criminally or had admitted to criminal conduct of the same kind. See Edward Wyatt, S.E.C. Changes Policy on Firms’ Admission of Guilt, January 6, 2012; Public Statement by SEC Staff: Recent Policy Change, Robert Khuzami.
The Second Circuit’s rejection of Judge Rakoff’s reasoning, however, has restored the status quo for regulatory settlements. The Second Circuit made clear that Judge Rakoff’s decision did not (and could not have) called for an admission of liability in order to approve the consent decree. Notably, the Court laid out a framework that district courts should use to evaluate any proposed consent decree. The review is for fairness, reasonableness, and concern for the public interest, with the purpose of the review to ensure that the decree is procedurally proper. There is no review for “adequacy of the settlement,” and the review should objectively measure the following four factors: (1) the legality of the decree; (2) whether the enforcement terms in the decree are clear; (3) whether the decree resolves the claims in the complaint; and (4) whether the decree is tainted by improper collusion or corruption of some kind. Id. at *7. Finally, the Court declined to delineate the “contours” of the factual basis needed to obtain approval for a decree, and reiterated that the courts should give the SEC “significant deference” in determining whether the decree serves the public interest. Id. *8-9. Ultimately, this is a win for government agencies, as the Court affirmed the deference due to their policies and judgment, and for companies’ seeking to negotiate settlements.