Second Circuit Clarifies Standard For Reviewing Enforcement Agency Consent Judgments

RMBS SEC Enforcement

On June 4, the U.S. Court of Appeals for the Second Circuit vacated and remanded a district court’s decision to reject a proposed settlement between the SEC and a financial institution in a securities fraud suit. SEC v. Citigroup Global Markets Inc., No. 11-5227, 2014 WL 2486793 (2d Cir, Jun. 6, 2014). In November 2011, the SEC and the financial institution entered into a consent judgment to resolve allegations that the institution violated securities laws in connection with certain mortgage-backed securities. Consistent with the SEC consent judgment convention at the time, the institution did not admit or deny any of the allegations as part of the agreement. Judge Jed Rakoff of the Southern District of New York rejected the agreement and held that because the parties agreed to settle without the institution having to admit or deny any of the underlying factual allegations, the settlement would deprive the public “of ever knowing the truth in a matter of obvious public importance,” and the court lacked evidence sufficient to determine whether the agreement was in the public interest. On appeal, the Second Circuit held that the proper standard for reviewing a proposed enforcement agency consent judgment is whether the proposed consent decree is fair and reasonable, and in the event the agreement includes injunctive relief, whether "the public interest would not be disserved." The court held that in evaluating whether an SEC consent decree is “fair and reasonable” one must review (i) the basic legality of the decree; (ii) whether the terms are clear; (iii) whether the decree resolves the actual claims in the complaint; and (iv) whether the decree is “tainted by improper collusion or corruption.” The court also ruled that the district court abused its discretion by requiring that the agreement establish the “truth” of the allegations, explaining that trials are meant to determine truth, while consent decrees are about “pragmatism.” Finally, the court held that the district court abused its discretion to the extent that it withheld approval of the settlement because it believes the SEC failed to bring the proper charges, which is the exclusive right of the SEC to decide.