A group of prominent law professors filed an amicus brief in the SEC enforcement action against Citigroup Global Markets, Inc. arguing
that the district court acted well within its discretion when it refused to approve
the proposed consent judgment because it did not have adequate information to determine
whether, after giving deference to the SEC, the proposed consent judgment was
fair, reasonable, adequate, and in the public interest. Amici said that the SEC’s
practice of settling enforcement actions alleging serious fraud without any
acknowledgement of facts in exchange for modest sanctions, which this case
exemplifies, does not further the public interest in ascertaining the truth or deterring
future securities law violations. A Second Circuit affirmance of the district
court’s order will not seriously constrain the SEC’s enforcement efforts,
contended the law professors, because the Commission has available a number of
alternative strategies. The brief was signed by Professor Barbara Black of the University of Cincinnati
and co-signed by, among others, Professors John Coffee of Columbia
University , James Cox of Duke University ,
Jill Fisch of the University of Pennsylvania , and Tamar Frankel of Boston University
In March of this year, a Second
Circuit panel stayed the district court proceedings after concluding that the
SEC and Citigroup have a strong likelihood of success in their appeal of and
effort to overturn the district court’s ruling.
Faced with the stark contrast between
the serious allegations and the modest relief requested, contended amici, the
district judge acted appropriately in seeking factual information in an effort
to understand this discrepancy. The court did not exceed its discretion in
refusing to approve a settlement where there was such a disparity between the
bare allegations and the proposed relief and where the factual information was
deficient. The trial judge correctly identified the potential for harm if a
court approves a consent judgment without information to exercise its own
independent judgment, said amici, in that the court would become a rubber stamp
for the agency.
Without information the court
cannot determine if the requested injunction is a proper remedial measure. The
injunction may be devoid of content and power in some cases, noted the law
professors, while in other cases the requested relief may be an abuse of the
agency’s power.
As self-described scholars of
the SEC and securities enforcement, amici are concerned with a number of the
SEC’s practices in its settlement of securities fraud cases by means of consent
judgments. The facts in the instant case illustrate a common practice, they
noted, in that the SEC filed a complaint alleging serious securities fraud
while simultaneously filing a proposed consent judgment with modest financial
penalties, a pro forma ``obey the law’’ injunction, an undertaking to implement
inexpensive remedial measures that appear to be window dressing and no
acknowledged facts. Both parties get what they want, noted the law professors, the
SEC has an opportunity to promote its success and Citigroup can put the matter
behind it and treat the settlement as a cost of doing business. In amici’s
view, the prevalence of this practice invites cynicism. The matter is swept
under the carpet, said the brief, and the public is left to wonder what
actually happened.
It also concerns amici that the
SEC measures success to a large extent by the number of actions brought. According
to the brief, the SEC’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. In particular, amici doubted whether quick and easy settlements are
likely to promote deterrence.
Finally, the brief said that federal
district courts should not be precluded from asking the SEC tough questions
since judicial review can lead to beneficial changes in SEC practices. For
example, in SEC v. Vitesse Semiconductor Corp. (SD NY 2011), a federal judge
pointed out the contradiction of allowing defendants in an SEC enforcement
action to settle the charges without admitting or denying the allegations after
they had previously pleaded guilty in parallel criminal proceedings. Subsequently,
the Division of Enforcement made a policy change to eliminate the neither admit
nor deny language where defendants have already admitted to or been criminally convicted
of conduct that formed the basis of the SEC enforcement action. If judicial
discretion to critically review consent judgments is curtailed, concluded the
law professors, an important impetus to encourage the agency to review and
revise its policies would be eliminated.