On Friday, January 6, 2012, the Securities and Exchange Commission announced a limited change to its policy of settling cases without requiring an admission of wrongdoing from the settling party. Under the new policy, in cases where criminal guilt has already been established, the settling defendant will no longer be able to “neither admit nor deny” the allegations at issue when settling with the SEC. However, this does not affect the vast majority of the SEC’s enforcement actions and will likely do little to ameliorate the concerns leveled against the SEC and this practice. While SEC Enforcement Division Director Robert Khuzami, in announcing the new policy, specifically said that the changes were not related to the Citigroup case (the outcome of which Director Khuzami has challenged in a strongly worded statement), they come on the heels of the recent rejection of a proposed $285 million settlement between Citi and the SEC.
Jed Rakoff, a federal judge in the Southern District of New York, in a strongly worded opinion, rejected the proposed settlement that was filed simultaneously with the SEC’s complaint in October as “neither fair, nor reasonable, nor adequate, nor in the public interest.” According to the SEC’s complaint, in early 2007 when Citigroup realized that the market for mortgage-backed securities was beginning to weaken, it created a billion-dollar Fund which under Judge Rakoff’s reading of the complaint “allowed [Citigroup] to dump some dubious assets on misinformed investors….Having structured the Fund as a vehicle for unloading these dubious assets on unwitting investors, Citigroup realized net profits of around $160 million, whereas the investors, as the SEC later revealed, lost more than $700 million.” After receiving the proposed settlement, Judge Rakoff “spent long hours trying to determine whether, in view of the substantial deference due the SEC in matters of this kind, the Court can somehow approve this problematic” settlement. Finding that it had “not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment,” the Court refused to approve the settlement and ordered the parties to proceed with trial in July of 2012.
In his opinion, Judge Rakoff railed against the SEC’s “neither admit nor deny” policy when settling cases as against the public interest and one that forces a court to become “a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, which the public is deprived of ever knowing the truth in a matter of obvious public importance.” The Court found that SEC settlements, like that in the Citigroup case, that do “not involve any admissions and that results in only very modest penalties” are “frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies.” Finding that the settlement only benefitted Citigroup and provided a “quick headline” for the SEC, Judge Rakoff held that the proposed settlement did not serve the public interest.
Barely containing his rage, Judge Rakoff concluded:
“Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But 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.”
Although the Second Circuit stayed Judge Rakoff’s ruling in late December, it appears that the SEC’s business-as-usual policy of allowing corporate bad actors to pay fines without a full investigation into and disclosure of the alleged wrongdoing is under siege. It will remain to be seen whether the SEC will voluntarily extend its recent policy changes to cases like Citigroup or whether it will be forced there by the courts.
