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Judge Rejects A “Minimalist Conception” Of The Courts

Tomorrow at the National Press Club in Washington, D.C., Corporate Crime Reporter is sponsoring a conference (see here [1]) focused on resolution policies and procedures in DOJ and SEC enforcement actions.  Top officials from the DOJ and SEC are participating and I am pleased to be on a panel focused on non-prosecution and deferred prosecution agreements.  Another topic to be discussed at the event is the SEC’s neither admit nor deny settlement policy.

This long-standing, yet controversial, policy is currently before the Second Circuit in SEC v. Citigroup (see prior posts here [2] and here [3]) and this policy also applies to many FCPA enforcement actions.

Thus, Judge Victor Marrero (S.D.N.Y.) was in a difficult position recently when deciding whether to approve the approximate $600 million neither admit nor deny settlement (in an non-FCPA action) between the SEC and a unit of SAC Capital Advisor.  (See here [4] for the SEC action).  In an April 16th order [5], Judge Marrero granted approval of the final judgment “conditioned upon the disposition of the pending appeal” of the SEC v. Citigroup case.

Judge Marrero’s order is a must read for those interested in following the growing judicial chorus questioning a central feature of most SEC settlements.  For how this settlement features contributes to the “facade” of enforcement in the FCPA context, see my 2010 article “The Facade of FCPA Enforcement [6].”

Like Judge Rakoff before him, Judge Marrero stated that although courts are bound to give deference to an executive agency’s assessment of the public interest, “this does not mean that a court must necessarily rubber stamp all arguments made by such an agency.”

Judge Marrero stated, in pertinent part, as follows.

“In assessing the appropriateness of the ‘neither admit nor deny’ provisions in [the settlement], the Court must perform a very delicate balancing act, walking a tightrope between various competing interests. It must recognize complexities that characterize government law enforcement proceedings, the difficult policy calls, and the expertise possessed by the administrative agencies entrusted with the responsibility to protect the public interest. To this end, the Court must avoid undue meddling and second-guessing, and must accord government agency law enforcement and financial determinations such as those now before it the proper level of deference they are due. At the same time, the Court cannot conceive that Congress intended the judiciary’s function in passing upon these settlements as illusory, as a predetermined rubber stamp to any settlement put before it by an administrative agency, or even a prosecutor. Such a minimalist conception of the Courts would make a mockery out of Congressional intent in delegating approval authority to the courts in these matters and cramp judicial independence in this context.”

“The parties have stressed that the inclusion of ‘neither admit nor deny’ provisions in regulatory settlements of civil proceedings is a longstanding and commonplace practice routinely pursued not only by the SEC, but many other federal agencies.  They have pointed out that, historically, courts in this district and others across the country, recognizing the sound practical and policy reasons warranting such a provision, have regularly approved such agreements without questioning the inclusion of ‘neither admit nor deny’ provisions.  Additionally, they emphasize, as this Court has acknowledged above, that a decision by a body of the executive branch of the federal government, particularly agencies possessing special expertise, to end an administrative enforcement action represents a prerogative that lies outside the ambit of the function of the judiciary, embodied in controlling doctrine requiring that courts accord due deference to such policy judgments.  The court agrees with these salient arguments.”

“However, implicit in the parties’ arguments is the premise that because the Court must accord deference to an administrative agency’s special competence to commence and resolve administrative proceedings, and because traditionally courts have not questioned settlements of civil enforcement actions that contain ‘neither admit nor deny’ provisions, therefore no circumstances exist in which enhanced judicial scrutiny, or perhaps even rejection, of a proposed consent judgment containing such a provision would be appropriate.  In essence, the parties are telling the Court that assessing the appropriateness of the inclusion of these ‘neither admit nor deny’ provisions in this particular action is none of the Court’s business.  Whether veiled or explicit, such a hard-line overstates the judicial deference due to administrative policy determinations, suggesting a form of absolutism that is unwarranted by law or reasonable public policy.”

“If courts traditionally have not challenged the inclusion of ‘neither admit nor deny’ provisions in civil enforcement actions, perhaps this outcome was obtained because fitting circumstances have not previously arisen that would compellingly justify that level of judicial intervention. It should come as no surprise that judges called upon routinely to resolve cases of the domestic “cats and dogs” variety would take special note when the elephant is first dragged into the courtroom. Nor should it startle anyone if among the questions the court raises on such an occasion is whether the rules of law meant to adjudicate the issues presented by one type of case should be extended to atypical others, or be adjusted to properly reflect the true nature of the beast.”

“The Court recognizes there are circumstances, possibly even in the vast majority of cases, in which it is perfectly reasonable for parties to a regulatory proceeding to agree to such a provision. A government regulatory agency and a defendant may deem it mutually advisable and beneficial for public and private reasons, and on financial, practical, and public policy grounds to settle civil enforcement proceedings without an admission of wrongdoing. Among the obvious considerations are: the resources necessary to prosecute and defend the action fully; the level of vindication, penalty, and deterrence achieved; the risks of loss weighed against the best the party might stand to gain from proceeding further with the action; exposure to liability from other lawsuits, business disruptions and effects on good will.  For example, where the likely cost of litigation and the amount at stake are relatively comparable, parties may agree to such a provision to  avoid the undue expenses and risk associated with proving culpability at trial.  In addition, the Court must recognize that, for the SEC, requiring an admission of culpability would in most cases undermine any chance of compromise with corporate defendants who face additional exposure from private lawsuits.  In the run-of-the-mill case, these concerns are likely to produce a reasonably balanced outcome, reflecting a fair measure of proportionality, defensible for the parties and other pertinent interests.”

“However, instances can and do arise in which courts should properly raise the level scrutiny they accord to particular settlement agreements in particular situations. Earlier precedents may not have entailed the extreme disparity evident in recent cases between the size and speed of a settlement on the one hand, and the plausibility of an absence of wrongdoing on the other.”

“Perhaps we live in a different era. In this age when the notion labeled “too big to fail” (or jail, as the case may be) has gained currency throughout commercial markets, some cynics read the concept as code words meant as encouragement by an accommodating public –  a free pass to evade or ignore the rules, a wink and a nod as cover for grand fraud, a license to deceive unsuspecting customers. Perhaps, too, in these modern times, new financial, industrial, and legal patterns have merged that call for enhanced regulatory and, as appropriate, judicial oversight to counter these sinister attitudes. This prospect raises concerns about whether the regulatory and judicial practices which have governed to date fail to reflect what new realties demand to adequately protect the public interest. Anyone who even superficially follows accounts of current events entailing well-known scandals – instance  involving extensive fraud or excess in the financial markets, environmental disasters, and hazardous consumer products -is likely to be impressed by a quality many of these events share: massive scale whose effects go well beyond mere matters of degree.”

“A few other qualities about these events bear comment. In the world, and in the eyes of the public whose perceptions pass judgment on official actions, harmful conduct on the scale of the contemporary models ordinarily does not occur absent some form of wrongdoing; the damage the victims suffer cannot always be blamed on acts of God or the mischief of leprechauns. For the people directly injured and for others who share an interest in these matters implicating broad public concerns, the purposes of the justice system embodied in compensation, deterrence, and punishment cannot be adequately satisfied, and there cannot be proper closure when incidents causing extensive loss occur, if the individuals or entities responsible for the large-scale wrongful consequences are not properly held accountable. These impressions hold doubly true in situations, such as may apply in the case at hand, where strong evidence of wrongdoing exists, or where at least circumstantially, as embodied in the doctrine of res ipsa loquitur, the events are unlikely to have happened without substantial misconduct.”

“In appropriate cases, the vast scope of the harmful actions referred to here, and the reach of their consequences, ought to be assessed in two ways. Quantitatively, they should be gauged by the staggering amounts of money, both profits and losses, that typically are involved in underlying wrongdoing that is alleged, with huge numbers of victims seriously injured worldwide, correspondingly matched by the perceived outsized rewards the offenders seek to derive from the illicit and damaging behavior. Qualitatively, the measure of these events should be taken by the sheer magnitude of the culpability the offending conduct presumptively would entail – the higher levels of daring, of risk-taking, of outright abuse that manifest tougher grades of arrogance and greed, as well as cavalier disdain for victims and the public good alike.”

“If true – a question that legislators, regulators, and other policy-makers, as well as judges when warranted, should closely examine within the respective domains – these new circumstances highlight the challenge of framing a fair, adequate, and reasonable response by all bodies of government entrusted by law with protecting the public interest against such outsized malfeasance. In this Court’s view, and perhaps as also perceived by other judges who recently have declined to grant uncritical approval to ‘neither admit nor deny’ provisions in proposed consent judgments for administrative enforcement actions, some of the uniquely harmful fact patterns emerging from modern financial and industrial market scandals should not be thrown into the mix with the run-of-the-mill cases. To do so would overlook the distinctive features of this new breed of cases that might require enhanced scrutiny, more careful review, and better tailored resolution.”

For additional coverage of Judge Marreo’s April 16th order, see here [7] from Reuters.