In an opinion today, Judge Rakoff, following a remand from the Second Circuit (see our post here), relucutantly approved the $285 million SEC-Citibank settlement that he had previously rejected and that involved no admission of wrongdoing.
Judge Rakoff offered a few criticisms of the Second Circuit’s decision, even as he concluded that it compelled the resulting settlement approval.
First, the Second Circuit’s opinion said that the SEC would be “politically liable if it fail[ed] to adequately perform its duties,” but Judge Rakoff countered: “It is difficult to know what the Court of Appeals meant by ‘politically liable’ since the SEC, by its charter, is designed to be free of political interference, see 17 C.F.R. §140.10, and routinely asserts its independence from political pressures.”
Second, the Second Circuit observed that a more searching review of settlement — along the lines of what Judge Rakoff had done initially — might be appropriate in cases where the court’s “initial review of the record raises a suspicion that the consent decree was entered into as a result of improper collusion between the S.E.C. and the settling party.” Judge Rakoff countered: “The Court of Appeals gave no indication of how a facial review of such a limited record, joined in by both parties, could raise a suspicion of collusion, nor did it offer any other example of where a fuller inquiry would be appropriate.”
Third, Judge Rakoff bristled at the suggestion in the Second Circuit’s opinion that the SEC could avoid judicial review altogether by bringing cases in its own administrative proceedings: “One might wonder: from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?” (Coincidentally, the WSJ has an Op-Ed expressing that same view today.)
The opinion concludes with Judge Rakoff conceding his own “sour grapes”:
[T]his Court fears that, as a result of the Court of Appeal’s decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever. But it would be a dereliction of duty for this Court to seek to evade the dictates of the Court of Appeals. That Court has now fixed the menu, leaving this Court with nothing but sour grapes.