Opinion

Alison Frankel

In powerful Citi ruling, 2nd Circuit stresses deference to SEC

By Alison Frankel
March 16, 2012

When U.S. Senior District Judge Jed Rakoff rejected a $285 million settlement between Citigroup and the Securities and Exchange Commission last fall, he offered a stern rebuke to SEC lawyers who’d suggested his role was not to protect the public interest. “A court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest,” Rakoff wrote in his oft-quoted ruling. “Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensible attribute of the federal judiciary.”

In the months since, at least three other federal judges have cited Rakoff in questioning whether settlements proposed by federal agencies serve the public interest, two in SEC cases and one in a Federal Trade Commission case. The SEC adopted a minor, mostly cosmetic revision in the policy that so provoked Rakoff — in which defendants are permitted to settle without admitting liability — but otherwise insisted that such compromises are the very foundation of federal enforcement efforts.

On Thursday, the agency’s position received a very powerful endorsement from the 2nd Circuit Court of Appeals. A three-judge panel ruled that the SEC’s case should be stayed pending a joint appeal of Rakoff’s ruling by the agency and Citigroup, overturning a Rakoff order that the case proceed. The extraordinary 17-page appellate ruling concludes that Citi and the SEC are likely to succeed in their argument that Rakoff was wrong to reject the settlement.

“The S.E.C. asserts that its settlement is in the public interest and that its access to a stay so as to protect the settlement is also in the public interest,” said the per curiam ruling by Judges John Walker, Pierre Leval, and Rosemary Pooler. “We are bound in such matters to give deference to an executive agency’s assessment of the public interest …. We have no reason to doubt the SEC’s representation that the settlement it reached is in the public interest. We see no bases for any contention that the SEC’s decision to enter into the settlement was ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’”

Rakoff “misinterpreted” precedent on his discretion to evaluate the public interest, the appellate judges found, and exceeded his judicial authority: “The responsibilities for assessing the wisdom of such policy choices and resolving the struggle between competing views of the public interest are not judicial ones,” the opinion said.

District court judges are not supposed to be rubber stamps for federal agencies, the appellate panel said, but nor are they “to dictate policy to executive administrative agencies.” Rakoff’s analysis of the SEC’s policy of entering settlements without insisting on admissions of liability, the court said, didn’t offer sufficient deference to the SEC.

“It is commonplace for settlements to include no binding admission of liability,” the opinion said. “A settlement is by definition a compromise. We know of no precedent that supports the proposition that a settlement will not be found to be fair, adequate, reasonable, or in the public interest unless liability has been conceded or proved and is embodied in the judgment. We doubt whether it lies within a court’s proper discretion to reject a settlement on the basis that liability has not been conclusively determined.”

Interestingly, the ruling is per curiam, or unsigned, perhaps because none of the appellate judges wanted to be singled out as harshly critical of Rakoff. Adding to the intrigue, Rakoff is scheduled to sit by designation on a 2nd Circuit panel Friday morning to consider (among other cases) an appeal of the dismissal of an auction rate securities class action. The defendant in the ARS case? Citigroup!

In a discussion that should be a huge relief to the SEC and defendants, the appeals court said Rakoff’s insistence on an admission of liability would undermine the agency’s ability to set its own enforcement agenda. Not only was Rakoff wrong in proclaiming his discretion to weigh the public interest, according to the 2nd Circuit, but he was wrong on whether the public is served by the SEC’s policy. “We question the district court’s apparent view that the public interest is disserved by an agency settlement that does not require the defendant’s admission of liability,” the panel said. “Requiring such an admission would in most cases undermine any chance for compromise.”

Thursday’s decision only addresses the preliminary question of whether the case should be stayed in the lower court while the full appeal takes place, and the panel takes care to say that the judges who ultimately hear that appeal are “free to resolve all issues without preclusive effect from this ruling.” The opinion also said that the 2nd Circuit will appoint counsel to brief and argue Rakoff’s side in the full-blown appeal, partially answering a question my colleague Carlyn Kolker posed.

Citi counsel Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison said in an email that Citi is “pleased with the 2nd Circuit’s ruling.” An SEC spokesman did not respond to an email request for comment.

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