This previous post discussed the Second Circuit’s March 2012 procedural decision regarding the SEC’s neither admit nor deny settlement policy in the context of SEC v. Citigroup and Judge Jed Rakoff’s (S.D.N.Y.) rejection of the proposed consent order.  Although not an FCPA case, as noted in various previous posts, the SEC’s neither admit nor deny settlement policy is very much at issue in most FCPA enforcement actions and contributes to what I have called the “facade” of FCPA enforcement (see here).

As noted in the prior post, the Second Circuit’s decision did not squarely address the merits of the SEC’s settlement policy, rather the issue before the Court was whether to stay the district court proceedings pending a merits based review of the issues.  The Second Circuit’s merits based review is forthcoming and the court is scheduled to hear arguments later this month.  This post highlights the brief filed on behalf of Judge Rakoff and the brief of amici curie securities law scholars filed by Professor Barbara Black (here – Univ. of Cincinnati College of Law).

Rakoff Brief

Among other things, the brief states as follows.

“[The SEC and Citigroup] essentially contend that this Court should force the district court to rubber-stamp their agreement simply because ‘it reflects an agreement reached in arm’s-length negotiations between experienced, capable counsel after meaningful [though undisclosed] discovery’ and has been determined by the SEC to serve ‘the public interest.’  Their argument ignores the well-settled law that federal judges have a responsibility to make an independent determination as to whether a federal agency’s proposed consent judgment is fair, adequate, and reasonable, and – in the view of a number of courts – in the public interest.”

Elsewhere, the brief states as follows.

“The law is clear that a federal judge has a responsibility to independently determine whether a proposed consent judgment satisfies well established standards of being fair, adequate, reasonable, and in the public interest. The deference due the SEC in considering a proposed consent judgment cannot and does not eliminate that responsibility, nor does the fact that the parties have agreed to the terms of a proposed court order require the judge to sign off on that order without inquiry into whether it meets those standards. In making that inquiry, depending on the particulars of the case before it, a federal judge has every right to seek an evidentiary basis where necessary to determine whether the proposed settlement conforms to the established standards.”

As to whether SEC complaints settled under the neither admit nor deny practice represent or show anything, the brief states as follows.

“The SEC contends that the allegations in its complaint that are not admitted or denied would suffice to constitute the requisite ‘showing’ but as the district court noted at the hearing, ‘people bring law suits all the time making all sorts of allegations, some of which are proved, some of which are unproved and the unproved ones are no better than rumor and gossip.’ This obvious reality is illustrated by the fact that in 2011 the SEC lost 25% of the cases that it tried in district courts.”

The brief also argues that the SEC’s and Citgroup’s position threatens the constitutional independence of the federal judiciary.  The brief states as follows.

“Finally, it would be remiss not to note that the position taken by the parties here threatens the constitutional independence of the federal judiciary. As the district court stated, it needed to ‘exercise a modicum of independent judgment’ in evaluating the proposed consent judgment because ‘[a]nything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensable attribute of the federal judiciary.’ [...]  Although the district court cannot interfere with the SEC’s responsibility to execute the securities laws, appellants give short shrift to the careful balance of authority inherent in the principles of separation of powers.  Depriving the district court of its capacity to reach a sound and reasoned judgment regarding the propriety of a proposed consent judgment and the imposition of injunctive relief would undermine the judiciary’s independence and thereby threaten the constitutional balance of power. [...]  The SEC’s and Citigroup’s concept of deference – in which courts would be effectively reduced to potted plants – would surely undermine the independence of the federal judiciary.”

Amicus Brief

The brief begins, in pertinent part, as follows.

“As scholars who study the SEC, we have concerns about the agency’s practice of settling enforcement actions alleging serious fraud without any acknowledgement of facts, on the basis of a pro forma “obey the law” injunction, a commitment to undertake modest remedial measures and insubstantial financial penalties. The prevalence of this practice is precisely why federal district courts must have discretion, when reviewing consent judgments between a government agency and a private party that include an injunction, to take into account the public interest.”  The brief states that “the requirement of judicial review serves as an independent check on settlements that may meet the needs of the settling parties, but do not serve the public interest because they neither inform the public of the truth of the allegations nor deter future violations.”

The brief states as follows concerning the SEC’s neither admit nor deny settlement practice.  “The prevalence of this practice invites cynicism.  Both parties get what they want.  The SEC has an opportunity to promote it success, and Citigroup can put the matter behind it and treat the settlement as a ‘cost of doing business.’  The matter is swept under the carpet, and the public is left to wonder what really happened.  [...]  The SEC’s position effectively leaves no place for judicial review.  ‘Trust us!’ says the SEC.”

The brief further states as follows.

“It also concerns us that the SEC measures success to a large extent by the number of actions brought. The SEC Chairman and the SEC Director of Enforcement frequently point with pride to the number of enforcement actions filed. For example, Director Khuzami recently testified before a Congressional committee: “… the SEC‟s enforcement program is achieving significant results. During FY 2011, the Commission filed 735 enforcement actions – more than the SEC has ever filed in a single year.”  Statements like these bear an unfortunate resemblance to a sheriff’s carving notches on his gun to prove his toughness. The agency’s emphasis on numbers reinforces the concern that the agency has incentives to settle on terms that may not be consistent with the public interest.”