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Continued Uncertainty Surrounding the Future of the SEC’s “Neither Admit Nor Deny” Settlement Practice

Since US District Court Judge Jed S. Rakoff of the Southern District of New York rejected a $285 million settlement between the Securities and Exchange Commission (SEC) and Citigroup Global Markets Inc. (Citigroup) last fall, both the SEC and federal courts have grappled with the future of what had been the SEC’s long-standing practice of permitting companies to settle cases without admitting any liability. However, the Second Circuit’s recent decision to stay the proceedings before the Southern District of New York, pending the resolution of the SEC and Citigroup’s appeals of Judge Rakoff’s settlement rejection, suggests that the appellate court may eventually set aside Judge Rakoff’s rejection of the parties’ settlement.  

In SEC v. Citigroup, Judge Rakoff held that the proposed consent judgment between the SEC and Citigroup was “neither fair, nor reasonable, nor adequate, nor in the public interest” because Citigroup had not admitted or denied the allegations set forth by the SEC1. Per Judge Rakoff, the proposed settlement did “not serve the public interest, because it ask[ed] the Court to employ its power and assert its authority when it does not know the facts.”2

In the immediate aftermath of Judge Rakoff’s ruling, Robert Khuzami, the Director of Enforcement at the SEC, issued a statement, noting that Judge Rakoff’s decision “ignore[d] decades of established practice throughout federal agencies and decisions of the federal courts.”3Further, Khuzami stated that “[r]efusing 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.”4

Notwithstanding Khuzami’s criticism of Judge Rakoff’s decision, in early January 2012, the SEC announced a policy change involving cases in which parallel criminal proceedings result in convictions or admissions of securities law violations. In such situations, per the new SEC policy, the “neither admit nor deny” language is no longer available, and the conviction or admission would be incorporated into the civil disposition. This policy change will likely have little impact on most defendants, since the bulk of cases brought by the SEC do not involve criminal proceedings.

In recent months, other US district courts have mimicked the reasoning employed by Judge Rakoff in rejecting no-admit, no-deny settlements. For example, in December 2011, US District Court Judge Rudolph T. Randa of the Eastern District of Wisconsin took issue with a proposed settlement between the SEC and Kass Corp. CEO, Michael Koss, and requested that the SEC provide additional information showing why the settlement was in the public interest.  In response, the SEC redrafted the proposed settlement agreement. More recently, US District Court Judge Richard A. Jones of the Western District of Washington rejected a proposed no-admit, no-deny settlement between the SEC and three individual defendants. Judge Jones criticized the SEC for seeking judgments against the defendants while reserving the right to request disgorgement remedies and civil penalties in the future.5

On March 15, 2012, in a per curiam opinion, a three-judge panel of the Second Circuit granted the motions of the SEC and Citigroup to stay district court proceedings, pending the resolution of their interlocutory appeals that seek to set aside Judge Rakoff’s decision rejecting the parties’ proposed settlement.6Although the panel did not hold that Judge Rakoff’s settlement rejection was improper, the Second Circuit concluded that the SEC and Citigroup had shown a likelihood of success on the merits of their appeals, which justified staying the lower court proceedings. Notably, the panel wrote that Judge Rakoff was likely incorrect in rejecting the proposed settlement on public policy grounds, stating that it is not “the proper function of federal courts to dictate policy to executive administrative agencies.”7

While the lower court proceedings remain stayed, on March 31, 2012, the Second Circuit scheduled oral arguments on the pending appeals for late September 2012.  Until then, the future of the SEC’s long-standing “neither admit nor deny” settlement practice will continue to remain unsettled.

1 SEC v. Citigroup Global Markets, Inc.,__ F. Supp. 2d __, 2011 WL 5903733, at *6 (S.D.N.Y. Nov. 28, 2011).

2 Id.

3 Robert Khuzami, Public Statement by SEC Staff: Court’s Refusal to Approve Settlement in Citigroup Case (Nov. 28, 2011), available at: http://www.sec.gov/news/speech/2011/spch112811rk.htm.

4 Id.

5 SEC v. Merendon Mining (Nevada), Inc. et al., No. 10 CV 00955 (Mar. 5, 2012).

6 SEC v. Citigroup Global Markets, Inc., __ F. 3d __, 2012 WL 851807 (2d Cir. Mar. 15, 2012).

7 Id. at

© 2023 Vedder PriceNational Law Review, Volume II, Number 149

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