Originally published November 30, 2011
Keywords: SEC, securities fraud, Citigroup, admission-free consent,
Earlier this week, a federal district court judge in Manhattan rejected a proposed $285 million settlement between the US Securities Exchange Commission (SEC) and Citigroup in a mortgage-backed securities matter. This decision calls into question the adequacy of the government's long-standing policy of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations.
The SEC charged Citigroup in October with securities fraud relating to its marketing of a billion-dollar mortgage securities fund. Specifically, the SEC alleged that Citigroup misrepresented how the fund securities were chosen and, believing the fund would lose value, took a short position in the fund for itself. The Commission alleged that investors lost almost $700 million and that the bank earned approximately $160 million in profits.
Judge Jed S. Rakoff, of the US District Court in the Southern District of New York, ruled that the $285 million settlement agreed upon by the parties was "neither fair, nor reasonable, nor adequate, nor in the public interest." Judge Rakoff criticized the SEC for its policy—"hallowed by history, but not by reason"—of entering into settlements in which defendants are not required to admit wrongdoing. Such a practice, Judge Rakoff stated, "deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact."
This rejection of admission-free consent decrees, if adopted by other courts, could substantially alter the way the SEC prosecutes securities fraud cases. For example, the SEC may choose to proceed administratively (rather than through litigation in the federal courts), or may favor deferred or non-prosecution agreements, which, depending on how they are drafted and enforced, may not require federal court approval. Alternatively, the SEC may begin pressing harder for admissions of wrongdoing, a policy that is certain to result in fewer settlements and more trials, and which will pile even more cases on an already overburdened federal docket.
More likely, however, is the possibility that the SEC may pressure defendants to agree to language that somehow acknowledges misconduct without specifically admitting wrongdoing, thereby satisfying the court's need to ground its judgment in fact, while still ensuring that the judgment does not create any collateral estoppel effect in private litigation. The SEC's recent settlement with Goldman Sachs, cited by Judge Rakoff in his decision, is an example of such a settlement. In that consent judgment, Goldman acknowledged that certain marketing materials it provided to its customers "contained incomplete information" and that "it was a mistake" not to have disclosed that and other information. SEC v. Goldman Sachs & Co. et al., No. 10 Civ. 3229. The SEC may now seek to include similar admissions in future consent decrees.
Beyond its potential effect on SEC prosecutions, this ruling may influence judicial attitudes toward other settlements that require court approval. Although Judge Rakoff distinguished between a dispute involving "[p]urely private parties," in which the parties "can settle a case without ever agreeing on the facts," and a dispute involving a "public agency," in which the public has an interest in "knowing the truth," the boundary between public and private interests may not always be clear. Class actions, for example, typically require judicial approval of settlements (which often include injunctive relief) to ensure that they are fair to the absent members of the putative class. Where the class numbers in the thousands, as is frequently the case, the distinction drawn by Judge Rakoff between public and private interests may be difficult to discern.
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