Court Overturns Rare Challenge of SEC-Wall St. SettlementTweet
June 4, 2014
A district judge abused his discretion when he rejected a proposed settlement between the Securities and Exchange Commission (SEC) and Citigroup, according to an opinion reached today by a U.S. appeals court. The opinion overturns a rare attempt by a federal judge to challenge a boilerplate enforcement action against a powerhouse Wall Street bank.
In a landmark 2011 decision that crystallized widely held concerns about the government’s oversight of Wall Street, U.S. District Judge Jed S. Rakoff threw out a proposed $285 million settlement between the SEC and Citi for alleged misdeeds tied to the 2008 financial crisis. Rakoff found that the proposed deal was “neither fair, nor reasonable, nor adequate, nor in the public interest.”
Without “some knowledge of what the underlying facts are,” Rakoff wrote, “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.”
Today’s 28-page opinion by U.S. Court of Appeals for the Second Circuit found that Rakoff “applied an incorrect legal standard” when he tossed out the Citi settlement.
“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,” the appellate court wrote. “Trials are primarily about the truth. Consent decrees are primarily about pragmatism.”
The court also held that “determining whether the proposed S.E.C. consent decree best serves the public interest” is a decision that “rests squarely with the S.E.C.” and “merits significant deference.”
In the Citi case, the bank did not admit or deny the agency’s charges—a common provision in government settlements that has come under fire by Rakoff and other critics in recent years. In the years since Rakoff’s 2011 decision, the SEC has taken steps to bolster its enforcement actions, such as requiring defendants to admit wrongdoing in some instances.
At the time of publication Michael Smallberg was an investigator for the Project On Government Oversight.
Topics: Financial Sector
Authors: Michael Smallberg
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