Previous posts (here and here) discussed the SEC v. Citigroup enforcement action assigned to Judge Rakoff (S.D.N.Y.).  Although not an FCPA enforcement action, at issue is the same SEC resolution policy at issue in many SEC FCPA enforcement actions; namely, the SEC’s policy of allowing defendants to resolve an action without admitting or denying the allegations.

In prior cases, Judge Rakoff has said that this policy contributes to a “facade of enforcement” (SEC v. Bank of America) and is a “stew of confusion and hypocrisy unworthy of such a proud agency as the SEC.” (SEC v. Vitesse Semiconductor – see here for the prior post. 

Last week, Judge Rakoff, in denying the SEC-Citigroup settlement, again had pointed words as to the SEC settlement device typically used in FCPA enforcement actions.  The order (here) stated as follows.   ” … [A] court,while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest.  Anything 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.”

Judge Rakoff stated that even after giving substantial deference to the views of the SEC, the court must still “be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.”  Applying these standards, Judge Rakoff concluded, “regretfully” that the proposed consent judgment was “neither fair, nor reasonable, nor adequate, nor in the public interest.”

Judge Rakoff then stated as follows.  “Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint.  But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.”

Judge Rakoff called the SEC’s long-standing resolution policy ”hallowed by history, but not by reason” and stated that the policy “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.”

Elsewhere, Judge Rakoff stated as follows.  “As for common experience, a consent judgment that does not involve any admissions and that results in only very modest penalties is just as frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies.”  Judge Rakoff noted that the “policy of accepting settlements without any admissions serves various narrow interests of the parties” and that from the limited information before the court it is hard to discern what the SEC “is getting from this settlement other than a quick headline.”

Judge Rakoff then says that the “point, however, is not that certain narrow interests of the parties might not be served by the Consent Judgment, but rather that the parties’ successful resolution of their competing interests cannot be automatically equated with the public interest, especially in the absence of a factual base on which to assess whether the resolution was fair, adequate, and reasonable.”

Judge Rakoff’s order concludes as follows.  “It is not reasonable, because how can it ever be reasonable to impose substantial relief on the basis of mere allegations?  It is not fair, because, despite Citigroup’s nominal consent, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged is patent.  It is not adequate, because, in the absence of any facts, the Court lacks a framework for determining adequacy.  And, most obviously, the proposed Consent Judgment does not serve the public interest, because it asks the Court to employ its power and assert its authority when it does not know the facts.  An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous.  The injunctive power of the judiciary is not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated.  If its deployment does not rest on facts – cold, hard, solid facts, established either by admissions or by trials – it serves no lawful or moral purpose and is simply an engine of oppression.”

Judge Rakoff stated that the “SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”

Judge Rakoff directed the parties to be ready to try the case on July 16, 2012.

In a statement (here), Robert Khuzami (Director of the SEC’s Division of Enforcement) states as follows.  “The court’s criticism that the settlement does not require an ‘admission’ to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial. It also ignores decades of established practice throughout federal agencies and decisions of the federal courts. Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court.  The settlement provisions cited by the court have been included in settlements repeatedly approved for good reason by federal courts across the country — including district courts in New York in cases involving similar misconduct.”

As I noted when first covering Judge Rakoff’s involvement in the SEC v. Citigroup enforcement action, one of the most exciting things that could happen in terms of SEC FCPA enforcement is for a future case to be assigned to Judge Rakoff.  However, that is unlikely to happen any time soon as few SEC FCPA enforcement actions are filed in the S.D.N.Y.  Most SEC FCPA enforcement actions are  filed in the U.S. District Court for the District of Columbia and judges in that district would be wise to follow Judge Rakoff’s lead in analyzing the policy implications of the SEC’s neither admit nor deny settlement policy.