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News March 19, 2012 Issue

SEC Gets Some Respect For Its "Neither Admit Nor Deny" Settlement Policy

Staring down the possible erosion of a decades-old settlement policy, the SEC got a boost from the Second Circuit last week when the appellate panel issued a stay to hold up a trial ordered by federal district court Judge Jed Rakoff in the SEC v. Citigroup case.

Back in November, Judge Rakoff rejected the SECís proposed settlement with Citigroup and ordered a prompt trial after determining that a settlement permitting Citigroup to neither admit nor deny the allegations could not serve the public interest. Judge Rakoff said such settlements leave unproven allegations in their wake that "are no better than rumor or gossip." As a result, he said the consent judgments required from the court to seal the deal are so unreasonable on their face that they should be disapproved.

The SEC however, has long held that these settlements serve a strong public interest. Actions are brought to quicker resolution so the SECís limited resources can be redirected elsewhere. Money can be recovered and returned to defrauded investors much more quickly than requiring them to sue a respondent individually. Clear messages are sent of the swift(er) consequences of wrongdoing.

The SEC and Citigroup together appealed Judge Rakoffís decision, and the SEC requested a stay of the trial in the district court until the Second Circuit issued its ruling on the appeals.

In its March 15 order, the Second Circuit granted the stay, saying it perceived "several problems" with Judge Rakoffís rationale in ordering the trial. His rejection of the settlement lacked appropriate deference to the SECís determination of what constitutes public interest. That assessment is not a judicial responsibility, said the panel.

"Based on our preliminary review, and noting that the settlement called for payment by Citigroup of $285 million, which would be available for compensation of investors who lost money, we see no basis to doubt that the SECís decision was made in consideration of all those factors," they said.

In his November 28 order rejecting the settlement, Judge Rakoff acknowledged the courtís obligation to give deference to the SECís decision, observed the panel, but there was no indication in the record that the court in fact gave deference to the SECís judgement. "The court simply disagreed," said the panel.

The panel found that irreparable harm would occur if the SEC and Citigroup were forced to proceed to trial, and that the district court would not be injured in the granting of the stay. The panel also concluded that the stay was in the public interest based on the SECís assertion that the settlement is in the public interest, and a stay would protect the settlement.

"We are pleased that the appeals court found Ďno reason to doubtí the SECís view that the settlement ordering Citigroup to return $285 million to harmed investors and adopt business reforms is in the public interest," said Division of Enforcement director Robert Khuzami. Such settlements include terms that reflect what the SEC believes it could obtain at trial, "without the risk of delay and uncertainty that comes with litigation," he said.

The Second Circuitís opinion was a "significant positive development" for the SECís enforcement program, said law firm Wilmer Hale.

The Second Circuit appears to accept the SECís policy arguments, and the order may indicate how the Second Circuit may ultimately rule on the substantive appeals. The order is also important because it removes some of the uncertainty created by Judge Rakoffís rejection of the SECís settlement practices. "Parties should take comfort in the fact that this decision strongly indicates that district courts should defer to the SECís settlement decisions," said Wilmer Hale.

The proposed settlement itself will hang in limbo however, at least until the Second Circuit rules on the merits of the SECís and Citigroupís joint appeals.

In the same order granting the stay, the appellate panel declined to expedite review of those motions.