SEC Likely to Win Its Defense of ‘No-Admit’ Citigroup Settlement, Appellate Panel Says
Federal regulators won an initial round Thursday in their defense of Wall Street fraud settlements that include no admission of wrongdoing.
The Securities and Exchange Commission and Citigroup “have a strong likelihood of success” in their joint effort to overturn a judge’s decision to reject their $285 million fraud settlement, a three-judge panel of Second Circuit Court of Appeals declared.
The appeals court agreed to consider whether U.S. District Court Judge Jed S. Rakoff overstepped his authority in rejecting one of the biggest settlements to emerge from the financial crisis, Citigroup’s proposed $285 million deal with the Securities and Exchange Commission.
The panel agreed that the SEC and Citigroup can challenge Rakoff’s ruling, and it also agreed to delay a scheduled trial in the case while that challenge is pending.
“We have no reason to doubt the S.E.C.’s representation that the settlement it reached is in the public interest,” the three-judge appellate panel wrote.
“We see no basis for any contention that the S.E.C.’s decision to enter into the settlement was ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,’” the panel wrote.
Rakoff challenged business as usual at the SEC in November, by declaring that with no acknowledgment of wrongdoing, the proposed settlement left in doubt both the truth of the charges and the appropriate size of the penalty. He had ordered the two sides to prepare for a July trial.
The case has the potential to force a revolutionary change in the policing of white-collar offenses, not just by the SEC but also by other regulators. Both Rakoff and the appeals court are based in Manhattan, where many corporate cases are filed.
The SEC is one of the nation’s top financial cops, policing offenses such as insider trading on Wall Street and fraudulent accounting by companies listed on the stock markets. The agency routinely settles cases instead of taking them to trial and allows defendants to put the civil charges behind them with a boilerplate clause declaring that they neither admit nor deny wrongdoing.
The agency has argued that if it could not settle on those terms, it would have to spend more time and money litigating, which would limit the number of cases it could pursue. Defendants would not ordinarily admit to the allegations, lawyers say, because doing so would expose them to liability in lawsuits filed by purported victims.
“If we had to litigate every case, we would bring a lot fewer cases,” SEC Chairman Mary Schapiro told reporters recently.