Having considered the various explanations given by a federal district court for its refusal to permit the settlement of an SEC enforcement action against Citigroup, a Second Circuit panel concluded that the SEC and Citigroup have a strong likelihood of success in their joint effort to overturn the district court’s ruling. The appeals court deferred to the SEC’s assertion that the settlement is in the public interest and that its access to a stay so as to protect the settlement is also in the public interest. (SEC v. Citigroup Global Markets, Inc, CA-2, No. 11-5227, March 15, 2012)
The panel had no reason to doubt the SEC’s representation that the settlement it reached is in the public interest. Thus, there was no basis for any contention that the SEC’s decision to enter into the settlement was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Nor was there any reason to doubt that the stay the SEC seeks, so as prosecute its challenge to the district court’s disallowance of the settlement, is also in the public interest Thus, the panel stayed the district court proceedings pending resolution of the appeals.
The panel had problems with the district court’s reasoning that a consent judgment without Citigroup’s admission of liability is bad policy and fails to serve the public interest because defrauded investors cannot use the judgment to establish Citigroup’s liability, According to the appeals court, that reasoning prejudges the fact that the bank had in fact misled investors and assumes that the SEC would succeed at trial in proving Citigroup’s liability.
The court appeared to assume that the SEC had a readily available option to obtain a judgment that established Citigroup’s liability, either by trial or settlement, but chose for no good reason to settle for less. According to the appeals panel, the district court’s logic appears to overlook the possibilities that Citigroup might well not consent to settle on a basis that requires it to admit liability, that the SEC might fail to win a judgment at trial, and that Citigroup perhaps did not mislead investors
A broader and more significant problem is that the court does not appear to have given deference to the SEC’s judgment on wholly discretionary matters of policy. The SEC’s decision to settle with Citigroup was driven by considerations of governmental policy as to the public interest. The district court believed it was a bad policy, which disserved the public interest, for the SEC to allow Citigroup to settle on terms that did not establish its liability.
However, the appeals panel emphasized that it is not the proper function of federal courts to dictate policy to executive administrative agencies. Federal judges, who have no constituency, have a duty to respect legitimate policy choices made by those who do. The responsibilities for assessing the wisdom of such policy choices and resolving the struggle between competing views of the public interest are not judicial ones. The Constitution vests such responsibilities in the public branches.
While conceding that there are circumstances under which courts can review an agency decision to settle, the panel said that the scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal. The numerous factors that affect a litigant’s decision whether to compromise a case or litigate it to the end include the value of the particular proposed compromise, the perceived likelihood of obtaining a still better settlement, the prospects of coming out better, or worse, after a full trial, and the resources that would need to be expended in the attempt. In the case of a public executive agency such as the SEC, said the panel, the factors include also an assessment of how the public interest is best served. These are precisely the factors that the US Supreme Court has recognized as making a discretionary agency decision unsuitable for judicial review.
Based on a 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, the appeals panel saw no basis to doubt that the SEC’s decision was made in consideration of all of those factors, citing the SEC’s Memorandum of Law in Response to Questions Posed by the District Court Regarding the Proposed Settlement.
While the district court verbally acknowledged its obligation to give deference to the SEC, noted the panel, there is no indication in the record that the court in fact gave deference to the SEC’s judgment on any of these questions. The SEC believed, for example, that the public interest was served by the defendant’s disgorgement of $285 million, available for compensation of claimants against Citigroup, plus other concessions. The court simply disagreed. In concluding that the settlement was not in the public interest, the court took the view that Citigroup’s penalty was “pocket change” and the SEC got nothing from the settlement but “a quick headline.”
In addition, the court does not appear to have considered the agency’s discretionary assessment of its prospects of doing better or worse, or of the optimal allocation of its limited resources. Instead, the district court imposed what it considered to be the best policy to enforce the securities laws. In short, the appeals court concluded that it is doubtful whether the court gave the obligatory deference to the SEC’s views in deciding that the settlement was not in the public interest.
The appeals court also questioned the district court’s apparent view that the public interest is disserved by an agency settlement that does not require the defendant’s admission of liability. The panel pointed out that requiring such an admission would in most cases undermine any chance for compromise. More importantly, it was doubtful that a federal court had the discretion to refuse to allow a private, sophisticated, counseled litigant to reach a voluntary settlement in which it gives up things of value without admitting liability.
The district court’s reasoning was that the settlement must be deemed to be either insufficiently onerous or excessively onerous unless the liability of Citigroup had been either proved or disproved at trial or one side or the other had conceded the issue was tantamount to ruling that in such circumstances a court will not approve a settlement that represents a compromise. It is commonplace for settlements to include no binding admission of liability, noted the appeals panel, adding that a settlement is by definition a compromise.
There is no precedent that supports the proposition that a settlement will not be found to be fair, adequate, reasonable, or in the public interest unless liability has been conceded or proved and is embodied in the judgment. The panel doubted whether it lies within a court’s proper discretion to reject a settlement on the basis that liability has not been conclusively determined. Indeed, emphasized the panel, requiring a binding admission of liability as a condition of approval of the settlement virtually precludes the possibility of settlement.