On Friday, December 16, 2011, the House Committee on Financial Services announced that it "will hold a hearing next year to examine the practice by the Securities and Exchange Commission of settling cases with defendants that neither admit nor deny complaints made by the SEC." The decades-long practice has garnered a great deal of attention recently, particularly in light of Judge Jed Rakoff’s November 28, 2011 decision (discussed here) to reject the SEC’s settlement with Citigroup Global Markets, Inc. due to that very practice The exact timing of the Congressional Committee hearing has not been set, yet.
The SEC has defended the practice in court cases (as discussed here), arguing that accepting settlements where the defendant neither admits nor denies wrongdoing "has been long endorsed by the Supreme Court" and "criticism of consent decrees for not including … an admission is ‘unjustified.’" The SEC has also advocated that transparency is provided in such cases "by the public filing of the allegations in the Commission’s Complaint, which [the defendant] has not denied." The Commission further argues that in such cases the "approach has clearly succeeded in clearly conveying that the conduct alleged did in fact occur."
In his Opinion rejecting the proposed settlement for $285 million (consisting of $160 million in disgorgement, $30 million in prejudgment interest and a $95 million civil penalty) between the SEC and Citigroup, Judge Rakoff noted that the Citigroup consented to the settlement "without admitting or denying the allegations of the complaint." Because the SEC was seeking a permanent injunction in the Citigroup case, Judge Rakoff found that he must consider the public interest (and rejected the SEC’s argument that it is the sole determiner of what is in the public interest):
Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes 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.
He further described the SEC’s long-standing policy of allowing parties to settle without admitting or denying the allegations as "hallowed by history, but not by reason" and depriving the Court "of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact." As a result, Judge Rakoff said he "cannot approve" the settlement "because the Court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment." He concluded that it was not reasonable, fair, adequate or in the public interest to ask the Court "to impose substantial injunctive relief, enforced by the Court’s own contempt power, on the basis of allegations unsupported by any proven or acknowledged facts whatsoever." The most obvious problem, according to the Court was it was being asked "to employ its power and assert its authority when it does not know the facts," a practice Judge Rakoff described as "worse than mindless, it is inherently dangerous."
As discussed here, on Thursday, December 15, 2011, the Commission appealed Judge Rakoff’s ruling and the SEC’s Director of the Division of Enforcement Robert Mr. Khuzami stated: "We believe the court was incorrect in requiring an admission of facts – or a trial – as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions. … The court’s new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country."
With that backdrop, the Congressional Committee will hold hearings, which was jointly announced by Committee Chairman Spencer Bachus (R – AL) and Ranking Member Barney Frank (D – MA). Chairman Bachus said "The SEC’s practice of using ‘no-contest settlements’ has raised concerns about accountability and transparency." while Rep. Frank echoed that the practice "raises serious issues."
According to the statement released by the Committee, "[t]he timing of the hearing will be announced at a later date, as will the list of witnesses the Committee will call to testify."
