Second Circuit Requires “Significant Deference” to SEC’s Decision to Enter into Consent Decrees in Regulatory Enforcement Actions

June 5, 2014

On June 4, 2014, the United States Court of Appeals for the Second Circuit issued an important decision in United States Securities and Exchange Commission v. Citigroup Global Markets, Inc., No. 11-5227, holding that a district court cannot "require an admission of liability as a condition for approving a settlement between" a defendant and the SEC (slip op. at 17) and that a court must afford "significant deference" to the SEC regarding the specific terms of a consent decree (id. at 25).  The court’s ruling marks a victory for both defendants and the government by preserving the utility of "no-admit/no-deny" consent decrees to reach negotiated resolution of disputes where litigation would be time-consuming and expensive, and where the outcome is anything but certain.

The underlying SEC enforcement action alleged that Citigroup failed to disclose that it bet heavily against a billion-dollar fund collateralized by subprime securities tied to the faltering U.S. housing market while simultaneously marketing the fund to investors.  Slip op. at 5.  The SEC also alleged that Citibank negligently misrepresented its role in structuring the fund by informing investors that the portfolio was chosen by an independent advisor when Citibank had itself selected a substantial amount of the fund’s negatively projected assets.  Id.

Rather than litigate the claims, Citigroup consented to a judgment in which it agreed to:  (1) a permanent injunction barring Citigroup from violating the applicable provisions of the federal securities laws; (2) disgorgement of Citibank’s net profits from the collateralized fund, in the amount of $160 million, plus prejudgment interest of $30 million; and (3) a civil penalty of $95 million.  Citigroup further agreed to make internal changes to prevent similar acts in the future.  Consistent with the SEC’s long-standing settlement policy (much like that typically used by other federal law enforcement agencies), Citigroup neither admitted nor denied the SEC’s allegations.  Slip op. at 5–6.

U.S. District Court Judge Jed S. Rakoff refused to approve the consent judgment, finding it to be "neither fair, nor reasonable, nor adequate, nor in the public interest . . . because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards."  Slip op. at 8.  The court explained that "when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant . . . the court, and the public, need some knowledge of what the underlying facts are," ideally in stipulated findings of fact.  Id. at 9.  Although the court did not explicitly demand an admission of wrongdoing as a condition for approving the parties’ settlement, it asserted that a court’s injunctive power "serves no lawful or moral purpose and is simply an engine of oppression" without "cold, hard, solid facts, established either by admissions or by trials."  Id. at 10. 

Both the SEC and Citigroup appealed, and obtained a stay of district court proceedings while the Second Circuit considered the appeal.

In its June 4 decision, the Second Circuit "quickly dispensed" with the notion that a district court can require a defendant to admit liability in a consent decree, holding 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."  Slip op. at 16–17.  The decision to require such an admission "rests squarely with the S.E.C."  Id. at 17.  Although a district court "will necessarily establish that a factual basis exists for the proposed decree" (id. at 22), the Second Circuit held unequivocally that "[i]t 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" (id. at 21).  "Trials are primarily about the truth," but "consent decrees are primarily about pragmatism" and necessarily involve compromise in which parties trade the risk and expense associated with trial for final and efficient resolution of disputed claims.  Id. at 21–23.  Assessment of these factors is "uniquely for the litigants to make" and "[i]t is not in 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."  Id. at 22.

Turning to the district court’s substantive treatment of the proposed settlement, the Second Circuit rejected the notion that "adequacy" plays any part in the district court’s review of a consent decree negotiated by the government.  Slip op. at 19–20.   The court emphasized that "the job of determining whether a proposed consent decree best serves the public interest . . . rests squarely with the S.E.C. . . . [and] merits significant deference."  Id. at 24–25 (emphasis added).  Approval of a consent decree does not invite a district court to "find the public interest disserved based on its disagreement with the S.E.C.’s decisions on discretionary matters of policy, such as deciding to settle without requiring an admission of liability."  Id. at 26.  Rather, "[t]he 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.’"  Id. at 25 (quoting Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 866 (1984)).

The district court’s role is limited to determining "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."  Slip op. at 19, 24–25.  The "primary focus" of this analysis is "ensuring the consent decree is procedurally proper, using objective measures," such as:  (1) the "basic legality of the decree," (2) "whether the terms of the decree . . . are clear," (3) whether the 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."  Id. at 20–21.  "Absent a substantial basis in the record for concluding that the proposed consent decree does not meet these requirements," the Second Circuit emphasized, "the district court is required to enter the order."  Id. at 19 (emphasis added).

A contrary ruling by the Second Circuit could have had significant implications for defendants in SEC enforcement actions as well as the SEC itself.  Requiring admissions as a condition of settlement could subject defendants to serious collateral consequences, including liability in private litigation and other regulatory actions.  More parties would be incentivized to take their chances at trial, raising costs for litigants and hampering the ability of government agencies to bring and efficiently conclude enforcement actions.

Notably, in the lengthy interim between the district court’s 2011 ruling and yesterday’s decision, the SEC revisited its policy of neither-admit-nor-deny settlements, publicly announcing last year that in certain cases the agency would require parties to admit liability as a term of the settlement.  (For an early assessment of the implications of this policy, see Marc Fagel, The SEC’s Troubling New Policy Requiring Admissions, Securities Regulation & Law Report (June 24, 2013), available at  The SEC has invoked the new policy sparingly, in fewer than a dozen cases to date.  However, while the SEC initially pledged to limit the admissions requirement to only the most egregious cases, more recent settlements including party admissions have included more technical, non-fraud violations, leaving ongoing concern about how the SEC would determine whether a defendant would be required to admit liability in order to settle the matter.

Even with that policy change, some judges in the wake of the lower court ruling have exercised heightened scrutiny over agency settlement decisions, including rejecting settlements outright due to the absence of an admission of liability.  See, e.g., SEC v. Van Gilder, No. 12-cv-02839 (D. Colo. Feb. 26, 2014) (rejecting settlement where defendant did not admit the allegations, citing the district court in Citigroup).  Several of these cases arose in New York and are thus subject to the Second Circuit’s decision, but even judges outside the Circuit may give some deference to the particularly direct admonitions in the decision.  As a result, the Citigroup decision gives the SEC much greater settlement latitude, particularly in New York–home of some of the country’s largest financial institutions as well as the SEC’s largest regional office.  Nonetheless, both the SEC’s change in policy and some ongoing uncertainty in other circuits will undoubtedly lead the SEC to continue taking a more aggressive settlement stance in select cases than was the case in the past.

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Gibson Dunn represented amicus curiae the Business Roundtable in United States Securities and Exchange Commission v. Citigroup Global Markets, Inc., urging reversal of the district court’s order.

Gibson, Dunn & Crutcher LLP   

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