On 4 June 2014, the federal appellate court in New York vacated the trial court's refusal to approve a settlement reached between the SEC and Citigroup. The appellate court thus lent support to private parties reaching settlements with government agencies such as the SEC on a compromise basis without admitting or denying fault.
In Citigroup, the SEC alleged that Citigroup violated the Securities Act of 1933 by claiming to investors that collateralised subprime mortgage-related investments were selected by an independent advisor when Citigroup itself put low-quality assets in the portfolio, against which Citigroup took a short position. The SEC and Citigroup reached a settlement by consent decree whereby Citigroup would pay $285 million in total, accept an injunction against further statutory violations, and temporarily change its internal practices. The district judge rejected the settlement because Citigroup neither admitted nor denied the facts alleged by the SEC. Without that information, the court reasoned, it would be "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."
The appellate court vacated the district court's decision because the lower court may not require the SEC to "establish the 'truth' of the allegations against a settling party" as a pre-condition to settlement. In addition, the lower court did not adequately defer to the SEC's determination as to whether the settlement harmed the public interest. While district courts might sometimes need additional facts before considering a settlement's fairness, the court's "primary focus . . . should be on ensuring the consent decree is procedurally proper." The appellate court also noted the many discretionary factors that go into settlement decisions, which "are uniquely for the litigants to make." The appellate court therefore vacated the district court's decision and ordered the lower court to reassess the settlement in light of the appellate opinion.
The district court's initial refusal to approve the settlement in Citigroup garnered a lot of public attention and raised questions about how the decision would impact future civil enforcement actions. But the appellate ruling that courts should focus primarily on the procedures followed rather than on the truth of the underlying allegations goes a long way toward restoring the ability of parties to reach mutually agreeable compromises in civil enforcement actions without risking the negative impact of admissions on later litigation and without facing heightened uncertainty as to whether the court will ultimately approve the settlement.
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