This article was written by guest author Michael C. Macchiarola. The author is a Distinguished Lecturer at the City University of New York.
On March 15, a panel of three Second Circuit judges stayed a proceeding in the courtroom of Judge Jed S. Rakoff of the Southern District of New York. The stay is pending resolution of Citigroup’s appeal of Judge Rakoff’s rejection of its proposed settlement with the Securities and Exchange Commission (“SEC” or “Commission”) in connection with a civil enforcement action accusing the bank of substantial securities fraud in connection with the sale of collateralized debt obligations. In granting the stay, the panel was persuaded that Citigroup presented a “strong showing of likelihood of success” in having Judge Rakoff‘s rejection of the original settlement set aside. The full appeal will be heard on the merits by a separate Second Circuit panel that remains “free to resolve all issues without preclusive effect” from the March 15th Order. While commentators were quick to declare the Commission and Citigroup as victors or characterize the stay as a “stinging rebuke,” the Second Circuit’s actions are far from a deathblow to Judge Rakoff‘s crusade. And, no date has yet been set for the appeal.
The recent Second Circuit order notwithstanding, reports of the demise of Judge Rakoff’s on-going argument with the SEC are greatly exaggerated. While the Second Circuit’s stay reveals an unsympathetic panel, the merits of the dispute will ultimately be heard by a different group, with the judge’s position briefed by counsel. And, while commentators have spilt much ink on the high-profile defendant, appealing facts or colorful judicial language of the Citigroup controversy, the value of the judge’s opinion is found, more basically, in his insistence that the proper role of the courts be respected in interactions with administrative agencies. It is unfortunate that the three Second Circuit judges issuing this week’s unsigned order do not seem to share the point of view. By requiring that the courts function to protect the “overriding public interest in knowing the truth,” Judge Rakoff has shown fidelity to Montesquieu’s warning (echoed by James Madison) that the power of judging should remain separated from the legislative and executive powers. At the same time, the judge has questioned an ad hoc brand of bureaucracy that allows the government to dispense a highly volatile and unpredictable version of regulation.
The judge’s credibility is bolstered by at least two facts unmentioned by the Second Circuit panel. First, Judge Rakoff’s actions have already shown tangible results in the earlier Bank of America controversy. Most notably, the judge’s effort exposed the facts surrounding some of the greatest transgressions of our Great Recession – facts that otherwise would have remained in the dark. His persistence also resulted in substantially increased reparations for the victims of Bank of America’s iniquities versus what the SEC had initially negotiated on their behalf. Second, the Commission remains free to negotiate any private arrangement that it would like with a defendant – without involving any court.
In civil litigation, it is well established that a dispute can be resolved by contract between the parties, and courts remain nearly powerless to shape their private bargain. An established public policy in favor of settlement reduces the number of trials, and is consistent with the civil justice system’s overall goal of ensuring a just, speedy, and inexpensive determination of every action. A deferential role for courts in evaluating consent judgments negotiated by government agencies finds root in the U.S. Constitution, with prosecutorial decisions exclusively an executive function.
Today, over ninety percent of SEC proceedings are settled. And, the overwhelming majority of courts have approved settlements rather routinely, without scrutinizing their factual bases or requiring substantive adjustment. This “rubber stamp” has persisted despite the fact that public agency settlements can be distinguished from the best private settlements because they (i) regularly impact third parties, (ii) often lack good faith negotiations between two equals, and (iii) generally derive from less noble motivations.
Today’s proposed SEC settlements routinely include boilerplate language prohibiting the settling party from engaging in similar violations in the future, and from making any public statement denying any allegations in the government’s complaint. This “non-admission / non-denial” posture seems unconcerned with the truth of an underlying allegation — typically disfavoring truthful facts in favor of a comfortable contrivance that each party can live with. Such a posture seems hostile to both the Commission’s charge to protect the integrity of the nation’s securities markets and a court’s duty to defend and ensure the public interest. The inattention to truth represents a particular absurdity within a regulatory structure that regularly calls upon registrants to abide by full, fair and accurate disclosure.
While not required, the Commission has increasingly sought court approval of each settlement, in an effort to gain the courts’ contempt and injunctive relief powers if a settling party subsequently violates an agreement’s terms. Yet, despite the formidable nature of the contempt remedy, by its own admission, the Commission has not frequently pursued civil contempt proceedings. In fact, the Commission admitted to Judge Rakoff that it does not appear to have initiated such proceedings against any large financial entity in the last ten years.
While the Second Circuit panel was quick to assert that “[i]t is not . . . the proper function of federal courts to dictate policy to executive administrative agencies,” it left unanswered just what authority a court retains if its judicial powers are given to the SEC as a matter of course and free of any real cost or inconvenience. With no real price to pay, it is no wonder that the Commission routinely seeks the judicial imprimatur. And, in that regard, the Second Circuit’s order says more about how the panel values judicial authority than anything else.