Second Circuit Vacates Judge Rakoff’s Decision Refusing To Approve Citigroup’s 'Neither Admit Nor Deny' Settlement With The SEC And Clarifies Standard For Evaluating Consent Decrees In Favor Of Pragmatism

The Second Circuit's long-awaited decision in SEC v. Citigroup Global Markets, Inc.,1 released on June 4, 2014, held that Judge Jed S. Rakoff of the Federal District Court for the Southern District of New York abused his discretion in refusing to approve a proposed consent decree between the Securities and Exchange Commission and Citigroup.2 The Second Circuit vacated the decision of the court below3 and remanded, clarifying the appropriate standard of review to preclude judicial evaluation of the "adequacy" of a consent decree. The Circuit held that the standard for reviewing a consent decree is simply whether it is "fair and reasonable," thereby limiting the District Court's substantive review of consent decrees to a significant extent. The Second Circuit also emphasized the discretionary power of the SEC in determining how to prosecute and settle enforcement actions, recognizing that the decision to settle a given case is a pragmatic one based on numerous factors. The Circuit held that the "exclusive right" to decide the charges to be asserted against a defendant rests with the SEC, and that the SEC's determination regarding whether a consent decree serves the public interest "merits significant deference."4 This decision should allay defendants' concerns that they will be forced to provide a binding admission before a settlement will be approved in civil district court proceedings, often a major issue in civil actions brought by regulators such as the SEC. It should not be viewed, however, as a signal that the SEC will abandon attempts to obtain such admissions when it deems appropriate, whether in the civil or administrative context.

LEGAL BACKGROUND

When deciding whether to approve consent decrees between the SEC and private parties, certain courts within the Second Circuit (including the District Court in this action) have evaluated whether the proposed settlement is "fair, reasonable and adequate."5 Where injunctive relief is included in the proposed consent decree, courts also must conclude that the "public interest would not be disserved."6 The Circuit observed that the "adequacy" requirement "appears borrowed from the review applied to class action settlements" where it makes "perfect sense" because such settlements may preclude future claims, and that this is not an issue with SEC consent decrees, where potential plaintiffs may bring their own actions.7

SEC v. CITIGROUP GLOBAL MARKETS, INC.

Background

The SEC filed a complaint against Citigroup in October 2011 alleging that Citigroup negligently misrepresented its role and financial interest in a billion-dollar fund known as "Class V Funding III," alleging that Citigroup influenced the selection of approximately half of the fund's assets, contrary to its statement to investors that the fund's portfolio...