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.