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Appeals Court Says Judge Erred in Blocking SEC-Citigroup Settlement
Deal Is in ‘Public Interest,’ Federal Court Says
By CHRISTOPHER M. MATTHEWS
June 4, 2014
An appeals court handed prosecutors and regulators a win Wednesday with a ruling that eases pressure on them to extract admissions of wrongdoing in settlements with companies.
The court said U.S. District Judge Jed Rakoff erred in rejecting a $285 million settlement between the Securities and Exchange Commission and Citigroup Inc. C +0.18% over claims the bank misled investors in a mortgage security. In that 2011 decision, Judge Rakoff rebuked the SEC for allowing the bank to settle without acknowledging it had done anything wrong.
Judge Rakoff’s decision helped stoke a debate over whether banks were being allowed to escape the financial crisis without consequences. It also helped spark a broader discussion about whether regulators were being tough enough on corporate crime. For years, it had been accepted practice for companies to settle without admitting any guilt, and Judge Rakoff’s ruling sparked alarm among some corporate executives that a standard practice was about to be cut off.
But the U.S. Second Circuit Court of Appeals’ ruling effectively gives a green light for the SEC to determine whether settlements should include an admission of wrongdoing.
“It is an abuse of discretion to require, as the district court did here, that the SEC establish the ‘truth’ of the allegations against a settling party as a condition for approving the consent decrees,” the three-judge panel wrote in a 28-page opinion. “The job of determining whether the proposed SEC consent decree best serves the public interest, however, rests squarely with the SEC, and its decision merits significant deference.”
The ruling comes in the wake of calls from judges, lawmakers and others for prosecutors and regulators to punish the financial industry for alleged misdeeds during the crisis. It was issued almost a year after SEC Chairman Mary Jo White made a landmark decision to change the agency’s long-standing settlements policy by requiring firms and individuals in some cases to admit wrongdoing to resolve cases or face being taken to court.
But the new policy has been applied sparingly. To date, the SEC—which brings hundreds of cases a year—has only obtained admissions in about half a dozen settlements.
SEC Enforcement Director Andrew Ceresney said the agency was pleased with the ruling Wednesday.
“While the SEC has and will continue to seek admissions in appropriate cases, settlements without admissions also enable regulatory agencies to serve the public interest by returning money to harmed investors more quickly, without the uncertainty and delay from litigation and without the need to expend additional agency resources,” he said in a statement.
A deputy for Judge Rakoff declined to comment, as did a Citigroup spokeswoman.
The SEC had accused Citigroup of selling investors slices of a $1 billion mortgage-bond deal called Class V Funding III without disclosing the bank was betting against $500 million of those assets.
Judge Rakoff, a well-known judge in Manhattan’s federal court, rejected the settlement, in part because he objected to a decades-old practice by the SEC that, in this case, meant Citigroup neither admitted nor denied wrongdoing as part of the deal.
The bank and the SEC argued they had provided Judge Rakoff with ample information to support the basis for the settlement and that the law doesn’t require an admission of wrongdoing in order for a judge to accept a settlement.
The judge’s frustration with the terms of some settlements had emerged before. In 2010, he harshly criticized, but approved, a $150 million settlement between Bank of America Corp. and the SEC, resolving claims the bank should have disclosed billions in losses at Merrill Lynch & Co. before it was acquired by the bank. Judge Rakoff at the time said the fine was “paltry.” The bank neither admitted nor denied wrongdoing.
Last year, he wrote an essay criticizing a lack of indictments among banking executives tied to the financial crisis. Justice Department officials have in the past cited the high burden in complex criminal cases of proving executives intended to commit fraud. A Justice Department spokesman declined to comment Wednesday.
But regulators and prosecutors appeared to have taken note. Prosecutors have moved in recent weeks to extract guilty pleas from two major financial institutions. The Justice Department is pushing BNP Paribas SA to plead guilty and pay more than $10 billion to end a criminal probe into allegations the bank evaded U.S. sanctions, according to people familiar with the matter. Credit Suisse pleaded guilty last month and agreed to pay $2.6 billion to end a probe into how its employees helped Americans dodge U.S. taxes.
“Rakoff might have lost the battle, but he won the war,” said Carl Tobias, a professor at the University of Richmond School of Law in Virginia.
Mr. Tobias said Judge Rakoff had acted as a “canary in the coal mine” and had inspired other judges to question the government’s handling of recent settlements involving financial institutions. The Second Circuit said in its opinion that it was appropriate for some level of judicial review of SEC settlements and that it would be appropriate for Judge Rakoff to request more information to “allay any concerns.”
But the court said it isn’t up to judges to determine whether a settlement is “adequate.” It also laid out a checklist of criteria that is appropriate for judges to review—that the settlement is legal, its terms are clear, it reflects a resolution of “actual claims in the complaint” and isn’t tainted by “improper collusion or corruption.”
The opinion could affect another major case pending in the Manhattan federal courthouse—a $602 million insider-trading settlement between the SEC and hedge fund SAC Capital Advisors LP, now known as Point72 Asset Management. Under the terms of that settlement, SAC won’t be required to admit wrongdoing.
U.S. District Judge Victor Marrero, who is handling the settlement, raised concerns about the SEC’s neither-admit-nor-deny policy last year. He approved the settlement pending the outcome of the appeal in the Citigroup case.
Cornelius Hurley, a professor at Boston University School of Law, cautioned the SEC and other enforcement agencies against putting too much stock in Wednesday’s ruling, given the political pressure for tougher settlements with the financial industry. “The SEC is now caught between the legal niceties the Second Circuit has afforded them and the zeitgeist,” he said “Which is going to rule? That’s a decision they have to make.”..
Read the article at: online.wsj.com