The SEC and Citigroup have asked the appeals court to declare that U.S. District Court Judge Jed S. Rakoff overstepped his authority last year in rejecting their settlement, one of the biggest to emerge from the financial crisis.
The appeals court panel ruled Thursday that the appeal can go forward, and it
agreed to delay a scheduled trial in the case while it is pending.
Thursday’s procedural ruling leaves the substance of the appeal unresolved, and another group of appeals court judges will continue with the case. Nonetheless, the judges who issued Thursday’s ruling sternly criticized Rakoff’s position.
“We have no reason to doubt the S.E.C.’s representation that the settlement it reached is in the public interest,” the appellate panel wrote. “We see no basis for any contention that the S.E.C.’s decision to enter into the settlement was ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’ ”
Rakoff challenged business as usual at the SEC in November by declaring that without Citigroup’s acknowledgment of wrongdoing, the proposed settlement left in doubt both the truth of the charges and the appropriate size of the penalty. He ordered the two sides to prepare for a July trial.
Rakoff appears to have given too little deference to the SEC’s judgment “on wholly discretionary matters of policy,” the panel wrote.
“While we are not certain we would go so far so to hold that under no circumstances may courts review an agency decision to settle, the scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal,” the appellate judges wrote.
If Rakoff’s ruling survives the appeal, it could force a revolutionary change in the policing of white-collar offenses, not just by the SEC but also by other regulators. Both Rakoff and the 2nd Circuit appeals court are based in Manhattan, where many corporate cases are filed.
The SEC is one of the nation’s top financial cops, policing offenses such as insider trading on Wall Street and fraudulent accounting by companies listed on the stock markets. The agency routinely settles cases instead of taking them to trial and allows defendants to put the civil charges behind them with a boilerplate clause declaring that they neither admit nor deny wrongdoing.
The agency has argued that if it could not settle on those terms, it would have to spend more time and money litigating, which would limit the number of cases it could pursue. Defendants would not ordinarily admit to the allegations, lawyers say, because doing so would expose them to liability in lawsuits filed by purported victims.