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Second Circuit As To SEC Settlement Policy – “It Is Not … The Proper Function Of Federal Courts To Dictate Policy To Executive Administrative Agencies”

Previous posts (here, here, and here)  have discussed Judge Jed Rakoff’s (S.D.N.Y.) concerns of the SEC’s neither admit nor deny settlement policy.  Judge Rakoff’s concerns have not been in FCPA cases, but the SEC uses the same settlement policy in FCPA cases – both corporate and individual resolutions.

Yesterday, in the SEC v. Citigroup enforcement action (in which Judge Rakoff previously denied the consent judgement between the parties stating that the SEC’s long-standing resolution policy was “hallowed by history, but not by reason”), the Second Circuit rebuked Judge Rakoff (see here for its opinion).  The Second Circuit’s decision did not squarely address the merits of the SEC’s settlement policy, rather the issue before the Court was whether to stay the district court proceedings pending a merits based review of the issues.  In granting the stay, the Court concluded “that the S.E.C. and Citigroup have a strong likelihood of success in their joint effort to overturn the district court’s ruling.”

The court began its opinion as follows.  “The challenge by both parties to the district court’s order raises important questions.  These include the division of responsibilities as between the executive and the judicial branches and the deference a federal court must give to policy decisions of an executive administrative agency as to whether its actions serve the public interest (and as to the agency’s expenditure of its resources).”

The court stated as follows.  “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 S.E.C., the factors include also an assessment of how the public interest is best served.”

As to Judge Rakoff’s decision, the Court stated as follows.  “A still more significant problem is that the court does not appear to have given deference to the S.E.C.’s judgment on wholly discretionary matters of policy. The S.E.C.’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 S.E.C. to allow Citigroup to settle on terms that did not establish its liability. It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies.  Elsewhere the Court stated 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 Court noted as follows.  “This does not mean that a court must necessarily rubber stamp all [agreements] made by such an agency.  It does mean at least that a court should not reject the agency’s assessment without substantial reason for doing so.”  The Court found that Judge Rakoff did not give proper deference to the SEC, but rather just disagreed with its settlement policy.

In so holding, the court stated as follows.  “We express no opinion one way or the other on what settlement policy would best serve the public interest. Our point is rather that it is not the proper function of federal courts to dictate to executive administrative agencies what policies will best serve the public interest.”

Given that both the SEC and Citigroup were united in opposing Judge Rakoff’s order and thus there was no adversarial briefing, the Court ordered that counsel be appointed in connection with the merits proceeding to argue in support of Judge Rakoff’s position.

For more on the Second Circuit decision, see here from Thomson Reuters, here from the New York Times, and here from the Wall Street Journal

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