Although outside the Foreign Corrupt Practices Act context, these pages have covered from day one (see here and here) Judge Rakoff’s concerns about SEC settlement policy as expressed in SEC v. Citigroup. As noted in this December 2011 post, Judge Rakoff refused to sign off on the settlement and in pertinent part stated:
“Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.”
Judge Rakoff called the SEC’s long-standing resolution policy ”hallowed by history, but not by reason” and stated that the policy “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.” Judge Rakoff’s stated that the “SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”
Yesterday, the Second Circuit concluded (see here for the decision) that the SEC does not need to establish “the truth” of the allegations against a settling party as a condition for approving consent decrees because, in the words of the Court, “trials are primarily about truth” whereas “consent decrees are primarily about pragmatism.” The Second Circuit’s rebuke of Judge Rakoff was hardly a surprise given the same court’s March 2012 procedural decision in the same case (see here for the prior post) in which it stated – as to SEC settlement policy – that “it is not … the proper function of federal courts to dictate policy to executive administrative agencies.”
In pertinent part, the Second Circuit concluded that “there is no basis in the law for the district court to require an admission of liability as a condition for approving a settlement between the parties. The decision to require an admission of liability before entering into a consent decree rests squarely with the S.E.C.”
Under the heading “scope of deference” the opinion states in pertinent part as follows (internal citations omitted).
“We turn, then, to the far thornier question of what deference the district court owes an agency seeking a consent decree. Our Court recognizes a “strong federal policy favoring the approval and enforcement of consent decrees.” “To be sure, when the district judge is presented with a proposed consent judgment, he is not merely a ‘rubber stamp.’”
The district court here found it was “required, even after giving substantial deference to the views of the administrative agency, to be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.” Other district courts in our Circuit view “[t]he role of the Court in reviewing and approving proposed consent judgments in S.E.C. enforcement actions [as] ’restricted to assessing whether the settlement is fair, reasonable and adequate within the limitations Congress has imposed on the S.E.C.to recover investor losses.’”
The “fair, reasonable, adequate and in the public interest” standard invoked by the district court finds its origins in a variety of cases. Our Court previously held, in the context of assessing a plan for distributing the proceeds of a proposed disgorgement order, that “once the district court satisfies itself that the distribution of proceeds in a proposed S.E.C. disgorgement plan is fair and reasonable, its review is at an end.” The Ninth Circuit— in circumstances similar to those presented here, a proposed consent decree aimed at settling an S.E.C. enforcement action—noted that “[u]nless a consent decree is unfair, inadequate, or unreasonable, it ought to be approved.”
Today we clarify that the proper standard for reviewing a proposed consent judgment involving an enforcement agency requires that the district court determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the “public interest would not be disserved,” in the event that the consent decree includes injunctive relief. Absent a substantial basis in the record for concluding that the proposed consent decree does not meet these requirements, the district court is required to enter the order.
We omit “adequacy” from the standard. Scrutinizing a proposed consent decree for “adequacy” appears borrowed from the review applied to class action settlements, and strikes us as particularly inapt in the context of a proposed S.E.C. consent decree.
The adequacy requirement makes perfect sense in the context of a class action settlement—a class action settlement typically precludes future claims, and a court is rightly concerned that the settlement achieved be adequate. By the same token, a consent decree does not pose the same concerns regarding adequacy—if there are potential plaintiffs with a private right of action, those plaintiffs are free to bring their own actions. If there is no private right of action, then the S.E.C. is the entity charged with representing the victims, and is politically liable if it fails to adequately perform its duties.
A court evaluating a proposed S.E.C. consent decree for fairness and reasonableness should, at a minimum, assess (1) the basic legality of the decree, (2) whether the terms of the decree, including its enforcement mechanism, are clear; (3) whether the consent decree reflects a resolution of the actual claims in the complaint; and (4) whether the consent decree is tainted by improper collusion or corruption of some kind. Consent decrees vary, and depending on the decree a district court may need to make additional inquiry to ensure that the consent decree is fair and reasonable. The primary focus of the inquiry, however, should be on ensuring the consent decree is procedurally proper, using objective measures similar to the factors set out above, taking care not to infringe on the S.E.C.’s discretionary authority to settle on a particular set of terms.
It is an abuse of discretion to require, as the district court did here, that the S.E.C. establish the “truth” of the allegations against a settling party as a condition for approving the consent decrees. Trials are primarily about the truth. Consent decrees are primarily about pragmatism. “[C]onsent decrees are normally compromises in which the parties give up something they might have won in litigation and waive their rights to litigation.”
Thus, a consent decree “must be construed as . . . written, and not as it might have been written had the plaintiff established his factual claims and legal theories in litigation.” Consent decrees provide parties with a means to manage risk. “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.“ These assessments are uniquely for the litigants to make. It is not within the district court’s purview to demand “cold, hard, solid facts, established either by admissions or by trials,” as to the truth of the allegations in the complaint as a condition for approving a consent decree.
As part of its review, the district court will necessarily establish that a factual basis exists for the proposed decree. In many cases, setting out the colorable claims, supported by factual averments by the S.E.C., neither admitted nor denied by the wrongdoer, will suffice to allow the district court to conduct its review. Other cases may require more of a showing, for example, if the district court’s initial review of the record raises a suspicion that the consent decree was entered into as a result of improper collusion between the S.E.C. and the settling party. We need not, and do not, delineate the precise contours of the factual basis required to obtain approval for each consent decree that may pass before the court. It is enough to state that the district court here, with the benefit of copious submissions by the parties, likely had a sufficient record before it on which to determine if the proposed decree was fair and reasonable.
The job of determining whether the proposed S.E.C. consent decree best serves the public interest, however, rests squarely with the S.E.C., and its decision merits significant deference. [F]ederal 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: “Our Constitution vests such responsibilities in the public branches.”
To the extent the district court withheld approval of the consent decree on the ground that it believed the S.E.C. failed to bring the proper charges against Citigroup, that constituted an abuse of discretion. […] The exclusive right to choose which charges to levy against a defendant rests with the S.E.C.
Finally, we note that to the extent that the S.E.C. does not wish to engage with the courts, it is free to eschew the involvement of the courts and employ its own arsenal of remedies instead. The S.E.C. can also order the disgorgement of profits. Admittedly, these remedies may not be on par with the relief afforded by a so‐ordered consent decree and federal court injunctions. But if the S.E.C. prefers to call upon the power of the courts in ordering a consent decree and issuing an injunction, then the S.E.C. must be willing to assure the court that the settlement proposed is fair and reasonable. “Consent decrees are a hybrid in the sense that they are at once both contracts and orders; they are construed largely as contracts, but are enforced as orders.” For the courts to simply accept a proposed S.E.C. consent decree without any review would be a dereliction of the court’s duty to ensure the orders it enters are proper.”
Judge Rakoff may have lost this case, but I agree with this New York Times article “that he had already secured a victory of sorts, having set in motion a series of events that swayed public opinion and influenced the S.E.C.’s broader enforcement agenda.” For instance, the SEC’s revision to its long-standing neither admit nor deny settlement policy (see here) is largely attributable to Judge Rakoff.
For additional analysis of the Second Circuit’s decision, see here from Professor Peter Henning writing at the NY Times Dealbook, here from Professor Eric Gerding writing at the Conglomerate.
In Gabelli v. SEC (see here for the prior post) a unanimous Supreme Court recognized that the SEC is a different type of plaintiff. Thus, the most troubling aspect of the Second Circuit’s opinion is the statement that if the “S.E.C. does not wish to engage with the courts, it is free to eschew the involvement of the courts and employ its own arsenal of remedies instead.”
As highlighted in my article “A Foreign Corrupt Practices Act Narrative,” in the FCPA context this is largely the path the SEC has chosen. As noted, in 2013 50% of SEC corporate FCPA enforcement actions were not subjected to one ounce of judicial scrutiny either because the actions were resolved via a non-prosecution agreement or administrative cease and desist orders.