Second Circuit Vacates Judge Rakoff’s Rejection of Consent Settlement in SEC v. Citigroup Global Markets

The United States Court of Appeals for the Second Circuit issued its long-awaited decision today on the appeal from Judge Jed S. Rakoff’s rejection in 2011 of the consent settlement in United States Securities and Exchange Commission v. Citigroup Global Markets Inc. The Court of Appeals vacated the district court’s order, holding that the lower court abused its discretion by applying an incorrect legal standard to its review of the settlement. The Second Circuit clarified the manner in which district courts should review SEC consent settlements, emphasizing the deference courts owe to the SEC and the parties with which it settles, including on the parties’ decision to settle without an admission of liability.

In its decision, the Court held that a district court must review consent decrees with enforcement agencies for fairness and reasonableness, with the additional requirement in cases seeking injunctive relief that the “public interest would not be disserved.” The opinion explained that “[a]bsent a substantial basis in the record for concluding that the proposed consent decree does not meet these requirements, the district court is required to enter the order.” In general, the Court noted that the “job of determining whether the proposed S.E.C. consent decree best serves the public interest … rests squarely with the S.E.C., and its decision merits significant deference.”

More specifically, the Court also concluded that (i) a district court may not review a consent decree for “adequacy”; (ii) it is an abuse of the district court’s discretion to require that the SEC establish the “truth” of the allegations against a settling party; (iii) the district court may not find the public interest disserved because it disagrees with the SEC’s decisions on “discretionary matters of policy,” including the SEC’s decision to settle without an admission of liability; and (iv) it is an abuse of the district court’s discretion to withhold approval of a consent decree because the district court disagrees with the SEC’s decision on which charges to bring against the settling party.

The majority opinion also provided a list of factors to consider in assessing fairness and reasonableness in consent settlements, including “(1) the basic legality of the decree; (2) whether the terms of the decree, including its enforcement mechanism, are clear; (3) whether the consent decree reflects a resolution of the actual claims in the complaint; and (4) whether the consent decree is tainted by improper collusion or corruption of some kind” (citations omitted). Although Circuit Judge Raymond Lohier, Jr. indicated in a concurring opinion that he believes these are the only four factors a court may consider, the majority opinion, which was written by Circuit Judge Rosemary S. Pooler and joined by Circuit Judge Susan L. Carney, suggests the list is non-exclusive. The majority opinion did explain, however, that “[t]he primary focus of the inquiry … should be on ensuring the consent decree is procedurally proper, using objective measures similar to the factors set out above, taking care not to infringe on the S.E.C.’s discretionary authority to settle on a particular set of terms.”

The decision remanded the case to Judge Rakoff to consider the settlement in light of the Court of Appeals’ opinion, though Judge Lohier’s concurrence indicates that he would have simply reversed outright on the record before the Second Circuit and directed the district court to enter the consent decree.

Davis Polk represented the Securities Industry and Financial Markets Association (SIFMA) on the appeal, filing an amicus brief in support of the appellants.