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Appellate Court Casts Doubt on Federal Judge Refusal to Accept SEC Consent Judgment

On March 15, 2012, the United States Court of Appeals for the Second Circuit cast significant doubt upon the validity of the November 29, 2011 ruling of a federal judge in Manhattan that rejected a proposed consent judgment negotiated by the Securities and Exchange Commission to resolve a civil complaint that the SEC had brought against Citigroup Global Markets Inc. of securities fraud. U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc.  The case has potentially broad implications on the right of the U.S. Government to settle civil cases and the discretion that lower court judges have in accepting such settlements.

In the lower court proceeding, on the same day that the SEC filed its complaint it filed with the Court a proposed final judgment against Citigroup and a proposed Consent of Citigroup.  The proposed Consent would have required Citigroup to pay a civil penalty and agree to certain other actions but would also have provided that Citigroup consent to the final judgment “without admitting or denying the allegations of the Complaint.”  In rejecting the proposed settlement and ordering that the case go to trial, the Judge stated that while some deference should be accorded to the SEC, it was difficult for the Court to determine whether the proposed settlement was in the public interest if there was no agreement as to the underlying facts that gave rise to the alleged violations of the law.

The lower court’s decision is the subject of an interlocutory appeal before the United State Court of Appeals for the Second Circuit.  In a procedural ruling, on March 15, 2012 the appellate court issued an order staying further procedures before the lower court pending a formal review and decision by a panel of the appellate court on the merits of the lower court’s ruling.  In issuing its decision, the Second Circuit held that the SEC and Citigroup had shown a strong likelihood of success in their appeal.  In doing so, and while clearly stating that its decision was not a final binding decision on the merits of the lower court’s action or the appeal, the Appellate Court panel hinted that it thought that the lower court’s decision was most likely incorrect and would ultimately be reversed.

It is a common practice in settling private lawsuits for the parties settling the case to “agree to disagree.”  That is, both parties may stipulate that they have a dispute but that in settling the dispute neither party admits or denies the truth of the allegations that led to the dispute in the first place or that one party’s rights were violated.  Even if a litigant agrees to stop a specific activity, or pay money to the other party, there is generally no admission of liability.  This approach to dispute resolution allows parties to practically resolve their legal disputes and move on with their businesses, without the expense and uncertainties of a trial.

Such settlements are often used in court cases brought by some federal agencies, such as the SEC.  Government agencies such as the SEC claim that they need to settle cases on such grounds in order to preserve limited enforcement resources.  Corporations frequently seek to settle government claims to avoid publicity and to maintain cooperative relationships with the government agencies that regulate them.  Such settlements can be especially important if private sector third parties decide to bring their own lawsuits against the corporation for the same activity.  When settling a government lawsuit without an admission or finding of liability a corporation can maintain to a court in subsequent private sector litigation that the facts regarding its conduct remain disputed and that the third parties bear the burden of proving those facts.

The lower court’s decision has raised questions about whether federal agencies and their corporate defendants should have less flexibility in structuring settlement agreements that will be “rubber stamped” by the federal court.  If upheld, corporate defendants will have to negotiate more creative civil action settlement agreements with their federal prosecutors if they continue to seek to inoculate themselves from the collateral estoppel effects of entering into such agreements.  The recent procedural ruling by the Second Circuit gives broad hints that the action of the lower court will most likely not withstand appellate scrutiny and that the government and private litigants will retain their ability to negotiate flexible settlement agreements.