Is Judge Rakoff Asking for Too Much? the New Standard for Consent Judgment Settlements with the Sec
Naoufal, Amanda S., American University Business Law Review
In SEC v. Citigroup Global Markets, Inc., Judge Rakoff rejected a $285 million settlement between the Securities and Exchange Commission ("SEC" or "Commission") and Citigroup. The complaint alleged that Citigroup failed to disclose its role in the selection of assets for a billion dollar collaterized debt obligation. Judge Rakoff rejected the consent judgment, concluding it was neither fair, nor reasonable, nor adequate, nor in the public's interest. The critical issue in Judge Rakoff's decision was the validity of the SEC's "no admit/deny" policy, which is a policy that has long been accepted by courts. He objected to this policy because it required the court to employ its power without the parties providing him a factual basis, which constrained his ability to exercise his independent judgment. This decision has great implications for the SEC's enforcement program. The SEC relied on courts' longtime acceptance of a standard that produced an efficient and effective process with regards to consent judgments. This Comment analyzes the differences between the traditional standard and the Rakoff standard by illustrating the differences that each standard has on the outcome of consent judgments. Finally, this Comment recommends that a combination of both standards be used for future consent judgments to ensure greater enforcement, accountability, and transparency.
The Securities and Exchange Commission ("SEC" or "Commission") is authorized to bring a civil injunction action as a form of enforcement against violators of securities laws.1 When the SEC brings a civil action in federal district court, it often requests an injunction against future violations of federal securities laws.2 A consent judgment, or consent decree, is a civil settlement incorporated within a judicial order3 and is used in more than ninety percent of the SEC's civil actions.4 Once a settlement is reached, the defendant consents to the entry of a judgment or order without admitting or denying the allegations.5 A judge then evaluates the proposed consent judgment with a limited source of information and, therefore, the entry of the consent judgment is often ministerial.6 Even though judicial inquiry is limited, the court is still required to exercise its independent judgment.7
The Supreme Court has long endorsed the use of consent judgments,8 and courts recognize consent judgments as an effective and efficient means of dispute resolution.9 The standard used to evaluate a consent judgment is whether the court finds the decree fair, adequate, reasonable, and in the public interest.10 A recent decision from the U.S. District Court for the Southern District of New York, however, used a different standard to evaluate consent judgments. The decision, if upheld, will likely have implications on the SEC's enforcement program.11
This critical decision was made on November 28, 2011, when Judge Jed Rakoffrejected a proposed $285 million settlement between the SEC and Citigroup Global Markets, Inc. ("Citigroup").12 Contrary to the normal practice of a limited judicial role, Judge Rakoffexpanded the role in reviewing consent judgments.13 He also placed a greater burden on the SEC to present more facts to justify the terms of the decree.14 Consequently, in SEC v. Citigroup Global Markets, Inc., Judge Rakoffopened the door to a new set of questions regarding consent judgments with federal agencies, causing fear that this decision will result in a stricter standard for consent judgment settlements.15
This Comment argues that ambiguity exists in the law regarding the standard used to evaluate consent judgments. The ambiguity is a result of some courts applying a lenient standard while others apply a more stringent standard, specifically that of Judge Rakoff's. This Comment analyzes the standard previously used to grant consent judgments ("traditional standard") and compares it to the stricter standard applied in Judge Rakoff's court ("Rakoffstandard"). …