Second Circuit Defers to SEC in Overturning District Court’s Rejection of Settlement with “Neither Admit or Deny” Language

5 June 2014
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Key takeaways:

  • The Second Circuit this week overturned a widely-publicized Southern District of New York opinion by Judge Rakoff, holding that Judge Rakoff abused his discretion in requiring, as a condition of approving the settlement between the SEC and Citigroup Global Markets Inc., that the SEC establish the “truth” of the allegations against Citi.
  • The Second Circuit’s opinion gives great deference to the SEC in the settlement process; however, the opinion acknowledges a role for the courts—and clarified the standard the district courts should use—when reviewing proposed settlements. According to the Second Circuit, when a district court reviews a proposed SEC settlement, it must determine whether the proposed settlement is “fair and reasonable,” and the “primary focus of the inquiry . . . should be ensuring the consent decree is procedurally proper.”
  • In June 2013, SEC Chair Mary Jo White announced a policy shift for the agency that, while perhaps not in direct response to Judge Rakoff’s ruling, nevertheless mirrored the policy shift advocated by Judge Rakoff. Specifically, Chair White announced that the SEC would require in certain cases that defendants admit to wrongdoing or else face trial. This contrasts with the SEC’s historical practice of allowing settling defendants to “neither admit nor deny” the SEC’s allegations.