The U.S. Securities and Exchange Commission is appealing a federal court decision that tossed out a proposed settlement agreement, possibly setting a troubling precedent for the commission.
Last month, federal judge Jed Rakoff refused to endorse a proposed settlement agreement between the SEC and Citigroup on the grounds that without admissions of fact by the firm it couldn’t judge whether the settlement is fair and in the public interest. Effectively, the ruling brings into question the SEC’s long-standing practice of entering settlements where defendants agree to neither admit or deny the regulator’s allegations.
The decision came at a particularly interesting time for Canadian regulators, as the Ontario Securities Commission is currently considering the introduction of similar no-contest settlements here in Canada too. The OSC proposals are out for comment until Dec. 20.
Meanwhile, the SEC said Thursday that it has decided to appeal the decision rejecting these sorts of settlements. In previous cases where Rakoff has rejected a similar settlement, it has been able to win approval by revising the terms of the deal.
In this case, however, the SEC’s director of enforcement, Robert Khuzami, warned that it could set a tough new precedent for the regulator. “We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits. For this reason, today we filed papers seeking review of the decision in the U.S. Court of Appeals for the Second Circuit,” he said.
“We believe the court was incorrect in requiring an admission of facts — or a trial — as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions,” he said, adding that the court’s new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country. “In fact, courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide,” he added.
No-contest settlements allow defendants to resolve cases without admitting to things that could be used against them in private lawsuits, and they enable regulators to resolve cases more quickly.
“In cases such as this, a settlement puts money back in the pockets of harmed investors without years of courtroom delay and without the twin risks of losing at trial or winning but recovering less than the settlement amount – risks that always exist no matter how strong the evidence is in a particular case,” said Khuzami. “Based on a careful balancing of these risks and benefits, settling on favorable terms even without an admission serves investors, including investors victimized by other frauds. That is due to the fact that other frauds might never be investigated or be investigated more slowly because limited agency resources are tied up in litigating a case that could have been resolved.”
He said the new standard, if it’s allowed to stand, could require the SEC to go to trial in many more cases, “likely resulting in fewer cases overall and less money being returned to investors.” He also stressed that the SEC will go to trial when proposed settlements fail to achieve the right outcome for investors.