Second Circuit Revives SEC “Neither Admit nor Deny” Settlements

It turns out reports of the death of  “neither admit nor deny” settlements between the Second Circuit Court and the Securities and Exchange Commission (SEC) were greatly exaggerated.

In a much-anticipated decision, the Second Circuit Court of Appeals recently reversed the ruling of Judge Jed. S. Rakoff, who had refused to approve the agency’s consent decree with Citigroup Global Markets Inc. (Citi).

The SEC entered into a consent decree with Citi in 2011 to resolve allegations that the company violated federal law in connection with certain mortgage-backed securities. While Citi agreed to pay a sizable financial penalty, the settlement did not include any admission of wrongdoing.

The SEC frequently settles cases on a “neither admit not deny” basis. However, Judge Rakoff refused to approve the consent decree, finding “it was bad policy, which disserved the public interest, for the SEC to allow Citigroup to settle on terms that did not establish its liability.”

The Second Circuit’s Decision

The Second Circuit concluded that the district court abused its discretion by applying an incorrect legal standard in its review of the consent decree and setting a trial date.

“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. Trials are primarily about the truth. Consent decrees are primarily about pragmatism,” the Second Circuit held.

The appeals court further ruled that the district court failed to give the SEC the proper deference. “The job of determining whether the proposed SEC consent decree best serves the public interest … rests squarely with the SEC and its decision merits significant deference,” the court explained.

The Second Circuit remanded the case back to Judge Rakoff with instructions to reevaluate the consent decree under the standards articulated in its opinion.

Future SEC Settlements

The Second Circuit’s decision gives the green light to future SEC settlement agreements that do not contain admissions of liability, including the agency’s pending consent decree involving SAC Capital. However, as we have previously discussed on this Business Law Blog, the SEC has already made changes to its settlement policy. Earlier this year, Mary Jo White signaled that the agency would require admissions in some cases, such as those involving particularly egregious conduct or significant harm to the markets or investors.