Monday, December 19, 2011

House Panel Will Conduct Hearings on Use of SEC Consent Judgments in Wake of Citigroup Ruling

House Financial Services Committee Chair Spencer Bachus (R-ALA) and Ranking Member Barney Frank (D-MASS) jointly announced that the Committee will hold a hearing next year to examine the practice by the SEC of settling enforcement actions with defendants that neither admit nor deny complaints made by the SEC. The SEC has proposed to settle a string of recent cases by levying fines without requiring the defendants to admit wrongdoing.

In the most recent case, a federal judge (SD NY) rejected a $285 million settlement between Citigroup and the SEC in November because, the judge said, he could not determine whether the settlement was fair, adequate or in the public interest since the SEC had alleged, but had not proven, that Citigroup committed fraud. Such settlements require approval by a federal judge.

The SEC’s practice of using no-contest settlements has raised concerns about accountability and transparency, noted Chairman Bachus, adding that he is pleased the Committee will examine these concerns in a bipartisan manner. The policy of signing agreements without forcing firms to admit or deny wrongdoing raises serious issues, said Rep. Frank, who expressed his appreciation that Chairman Bachus is moving to address this issue in a bipartisan, cooperative manner.

The timing of the hearing will be announced at a later date, as will the list of witnesses the Committee will call to testify

The court said that the consent judgment was neither fair, nor reasonable, nor adequate, nor in the public interest. It is not reasonable, said Judge Rakoff, 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, there is a potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged patent. It is not adequate, because, in the absence of any facts, the court lacked a framework for determining adequacy. And, the proposed consent judgment does not serve the public interest because it asks the court to employ judicial power and assert judicial authority when it does not know the facts. SEC v. Citigroup Global Markets, Inc., SD NY, 11 Civ. 7387, Nov. 28, 2011.

The SEC's long-standing policy of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations deprived the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.

The SEC took the position that, because the financial institution did not expressly deny the allegations, the court, and the public, somehow knew the truth of the allegations. This is wrong as a matter of law and unpersuasive as a matter of fact, said the court. As a matter of law, an allegation that is neither admitted nor denied is simply that, an allegation. It has no evidentiary value and no collateral estoppel effect.

The court observed that 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.

Moreover, the court found that the combination of charging the financial institution only with negligence and then permitting it to settle without either admitting or denying the allegations deals a double blow to any assistance defrauded investors might seek to derive from the SEC enforcement action in attempting to recoup their losses through private litigation, since private investors not only cannot bring securities claims based on negligence, but also cannot derive any collateral estoppel assistance from Citigroup's non-admission/non-denial of the allegations.

The SEC will appeal the federal district court’s rejection of the proposed settlement to the US Court of Appeals for the Second Circuit.

In an earlier memorandum to the federal district court, the SEC noted that use and entry of consent judgments has long been endorsed by the US Supreme Court. Lower federal courts have recognized the importance of consent judgments to the SEC’s effective and efficient enforcement of the federal securities laws. In its 1983 ruling in SEC v. Clifton, the DC Circuit noted that, because of its limited resources, the SEC has traditionally entered into consent decrees to settle most of its injunctive actions.

The SEC said that there is nothing unusual or untoward about a consent decree entered into without an admission of wrongdoing by the defendant, and that criticism of consent decrees for not including such an admission is unjustified. Consistent with this standard practice, the SEC has long used consent decrees in which defendants admit no wrongdoing.

Courts have repeatedly recognized the balance of advantages and disadvantages in settlements entered in no admit/deny enforcement actions and have been reluctant to upset that balance, said the SEC. While the defendant is not subject to collateral estoppel with regard to the claims asserted, acknowledged the SEC, investors are able to pursue any available private remedies, in addition to the relief obtained by the SEC. Moreover, the SEC was able to bring the matter to a speedy conclusion, obtain compensation for victims in a timely manner, and allocate limited resources to bring additional enforcement actions for the protection of more investors.

No comments: