A U.S. judge has tossed out a settlement between the U.S. Securities and Exchange Commission and Citigroup Global Markets Inc. on the grounds that it can’t judge whether deals that don’t involve admissions by the defendant are fair.
Judge Jed Rakoff of the U.S. Southern District of NY has declined to endorse the settlement between the bank and the regulator because he finds the common U.S. practice of entering settlements with the accused in a case neither admitting or denying the contents of the regulatory order leaves the court with no basis to judge the merits of the deal.
The decision comes at a time when the Ontario Securities Commission is considering the use of such settlements in Canada, in the hope of speeding up settlements and improving enforcement productivity. The OSC proposed the introduction of these sorts of deals in late October, and its proposals are out for comment until Dec. 20.
In the SEC v. Citigroup case, the court’s decision indicated that it has “spent long hours trying to determine whether, in view of the substantial deference due the SEC in matters of this kind, the court can somehow approve this problematic consent judgment. In the end, the court concludes that cannot approve it because the court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment.”
It notes that it must be satisfied that a settlement is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest. However, without knowing the basis for the deal, it finds that it can’t make that decision. Moreover, it stresses that it’s important for the public to learn the truth.
“Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance,” it says.
The decision notes that the SEC’s long-standing policy of entering these sorts of deals is “hallowed by history, but not by reason”, and it says that a settlement that does not involve any admissions and that results in only very modest penalties is “frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies.”
It says that if the allegations of the SEC’s complaint are true, “this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business. It is harder to discern from the limited information before the court what the SEC is getting from this settlement other than a quick headline.”
And, it says that the deal may shortchange harmed investors. “The combination of charging Citigroup only with negligence and then permitting Citigroup to settle without either admitting or denying the allegations deals a double blow to any assistance the defrauded investors might seek to derive from the SEC litigation in attempting to recoup their losses through private litigation, since private investors not only cannot bring securities claims based on negligence, but also cannot derive any collateral estoppel assistance from Citigroup’s non admission/nondenial of the SEC’s allegations.”
While the deal may serve the narrow interests of the firm and the SEC, it cannot be automatically equated with the public interest, it says, “especially in the absence of a factual base on which to assess whether the resolution was fair, adequate, and reasonable.”
“It is not reasonable, because how can it ever be reasonable to impose substantial relief on the basis of mere allegations? It is not fair, because, despite Citigroup’s nominal consent, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged patent. It is not adequate, because, in the absence of any facts, the court lacks a framework for determining adequacy. And, most obviously, the proposed consent judgment does not serve the public interest, because it asks the court to employ its power and assert its authority when it does not know the facts,” it says.
“Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances,” it concludes.
Head of enforcement at the SEC, Robert Khuzami, defended the Citigroup settlement in a statement released late today, saying, “While we respect the court’s ruling, we believe that the proposed US$285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial.”
Khuzami argues that the court’s criticism “disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial. It also ignores decades of established practice throughout federal agencies and decisions of the federal courts. Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court.”
He also points out that the SEC’s complaint “fully and accurately sets forth the facts that support our claims in this case as well as the basis for the proposed settlement. These are not ‘mere’ allegations, but the reasoned conclusions of the federal agency responsible for the enforcement of the securities laws after a thorough and careful investigation of the facts.”
“We will continue to review the court’s ruling and take those steps that best serve the interests of investors,” he concludes.