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1394Second Circuit Sets Standard for Approving Consent Decrees

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  • Baker, John
    Jun 4, 2014
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      The U.S. Court of Appeals for the Second Circuit has released a decision setting standards for judicial consideration of proposed consent decrees in cases brought by the Securities and Exchange Commission or other government agencies. SEC v. Citigroup Global Markets, No. 11-5227 (2d Cir. June 4, 2014). The case involves allegations that Citigroup created a billion-dollar fund of mortgage-backed securities and misrepresented to investors that the fund's assets were attractive investments rigorously selected by an independent investment adviser. The SEC and Citigroup reached a settlement that provided for disgorgement of $160 million in profits, plus $30 million interest, and a civil penalty of $95 million, as well as internal measures to prevent recurrences and a permanent injunction against future violations. However, Federal Judge Jed Rakoff refused to approve the settlement, because there was insufficient evidence for him to be satisfied that the court was not being used as a tool to enforce an agreement that was unfair, unreasonable, inadequate, or in contravention of the public interest. SEC v. Citigroup Global Markets, No. 1:11-cv-07387 (S.D.N.Y. Nov. 28, 2011).


      The Second Circuit, in a unanimous opinion by Judge Rosemary Pooler, ruled that a district court considering a proposed consent judgment involving an enforcement agency must determine whether the proposed consent decree is fair and reasonable. In addition, the court must determine that the public interest would not be disserved in the event that the consent decree involves injunctive relief (e.g., if it barred private litigants from pursuing their own claims independent of the relief obtained under the consent decree). Absent 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. The standard does not include the adequacy of the decree, which is a determination for the agency.


      The court explained that an evaluation of a proposed consent decree for fairness and reasonableness should, at a minimum, assess (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. The primary focus of the inquiry should be on ensuring the consent decree is procedurally proper, taking care not to infringe on the SEC's discretionary authority to settle on a particular set of terms. While there must be a factual basis for the decree, the SEC's factual averments, neither admitted nor denied by the wrongdoer, in many cases will suffice. 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 decree.


      The court remanded the case to the district court for further proceedings in accordance with its opinion. Judge Raymond Lohier, in a concurring opinion, indicated that he would be inclined to reverse and direct the district court to enter the consent decree, but said it did no harm to permit the very able and distinguished district judge to make that determination in the first instance.


      The ruling is obviously a considerable victory for the SEC. In many cases, however, it will result in more, not less, scrutiny of proposed settlements by district judges. The court itself noted that, if the SEC chooses to call upon the power of the courts in ordering a consent decree and issuing an injunction, then the SEC must be willing to assure the court that the settlement proposed is fair and reasonable. For the courts simply to accept a proposed SEC consent decree without any review, the opinion concludes, would be a dereliction of the court's duty to ensure the orders it enters are proper.


      The Second Circuit's opinion is available online at



      http://www.ca2.uscourts.gov/decisions/isysquery/928128a4-1ae9-4467-9cfc-e20592e26ba1/1/doc/11-5227_opn.pdf


      For the opinion below by Judge Rakoff, see


      http://www.nysd.uscourts.gov/cases/show.php?db=special&id=138






      John M. Baker, Esquire
      Stradley Ronon Stevens & Young, LLP
      1250 Connecticut Avenue, N.W., Suite 500
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