Oral argument was held before a Second Circuit panel reviewing a district court’s decision refusing to approve a proposed consent judgment between the SEC and Citigroup Global Markets, Inc. because it did not have adequate information to determine whether the proposed consent judgment was fair, reasonable, adequate, and in the public interest. The arguments were heard before Circuit Judges Pooler, Carney and Lohier.
Judge Lohier asked why in the world an Article III judge would try to control a consent decree process where there is a federal executive agency, the SEC, that has made its determination with vastly more facts available to it than the district court that this is a fair, adequate and reasonable settlement that is in the public interests. Judge Lohier said that the executive is in a better position to determine what is in the public interest.
John Wing, arguing for the district court, said that the district judge is obligated to review consent judgments and it is clear that there is an obligation on a district court, apart from the executive, to just review according to a standard that is well established. Fairness, reasonableness and adequacy are things that a court has to look at. It doesn't mean in every case or in most cases that there should be some extensive exploration of evidentiary facts. It may not be necessary for all sorts of reasons. This case really raised concerns because there were problematic issues, said Mr. Wing.
Judge Lohier queried why isn't it up to the SEC to determine the strength and weakness of its own cases. Sometimes, he continued, both on the civil side and criminal side, prosecutors and enforcement officials aspire to great things in connection with a particular case and determine, after more thinking and after the allegations are in the public arena, that a case is actually much weaker than they initially thought. Why then can't the SEC settle at what appears at first blush to be a substantial haircut from the allegations.
The SEC can, replied Mr. Wing. There is no question that the judge agrees that the SEC should be entitled to deference. But the judge is not limited to automatically saying I'll approve any consent judgment you bring me because you're the SEC and you're doing the public good. He has a standard that he has to apply and the standard is, can we say it's fair, reasonable and adequate.
Michael Conley, for the SEC, noted that courts that have looked at cases involving government agencies charged with responsibility for protecting securities laws that have negotiated at arms length with very capable counsel on the other side have given great deference to the agency's judgment of whether to settle.
Mr. Conley said that the Commission believes that the district court improperly failed to give any deference to the SEC in this case in its judgment that entering into a consent judgment here protects investors and the public interest, and, for that reason, the decision should be reversed. When it refused to enter the consent judgment in this matter, continued Mr. Conley, the district court imposed a new bright-line rule under which it would not impose any consent judgment that includes injunctive relief unless the defendant admits the allegations. SEC counsel noted that the Second Circuit has held that, where any settlement agreement is entered into at arms length by capable counsel, there is a presumption that it's fair, adequate and reasonable. And that presumption is heightened in circumstances like this where one of the parties negotiating the agreement is charged with responsibility for protecting the public interest through enforcement of the federal securities laws.
Judge Pooler asked why the SEC needs the injunction since it appears never to seek relief under any injunction the agency gets. Mr. Conley replied that, while it is true that the SEC rarely pursues contempt for violation of an injunction, part of that is because of the limitations on civil contempt where the misconduct has to be ongoing. However, the injunction also provides a good prophylactic remedy because of the potential for such actions. Moreover, the injunctions entered in these cases are the predicate for certain other collateral consequences which can also have a substantial remedial effect.
Brad Karp, arguing for Citigroup, noted that the SEC submitted a memorandum in support of the complaint. And then, Judge Rakoff asked the parties to respond to nine specific questions. The SEC put in a 28-page response laying out in detail the basis for the SEC's settlement, the consent judgment, the reasons for the injunctive relief, and the evidentiary support for the various components of the settlement including the disgorgement amount, the interest component, and the penalty. Citigroup put in a 23-page response to Judge Rakoff. Every question posed by Judge Rakoff was responded to fully and completely by both parties, emphasized Mr. Karp.
Mr. Karp also cautioned that many corporations will decide not to settle an enforcement action if a price of settlement is admitting liability or permitting a district judge to make a finding of liability in connection with a federal regulatory consent judgment. Nor would this court's ruling be limited to the SEC. There are more than 20 federal regulatory agencies that currently permit no-admit settlements. Mr. Karp warned that the federal regulatory enforcement regime would screech to a grinding halt if a majority of corporate defendants decided not to participate in settlements, but instead put the various federal regulators to trial.