Journalism in the Public Interest

Can a Judge Really Block the SEC’s Settlement With Steven Cohen?

A ruling in a similar case last year suggests that judges do not have the authority to reject settlements in which firms neither admit nor deny wrongdoing.


Hedge fund manager Steven Cohen, founder and chairman of SAC Capital Advisors, at a conference in Las Vegas, Nev., on May 11, 2011. A federal judge questioned a settlement on insider-trading allegations between SAC Capital Advisors and the SEC last week. (Steve Marcus/Reuters)

Judge Victor Marrero last week became the latest federal judge to question a time-honored tactic of federal regulators: negotiating settlements in which companies pay millions of dollars in penalties without admitting or denying that they've actually done anything wrong.

In the case before Marrero, SAC Capital Advisors, a hedge fund run by the billionaire investor Steven A. Cohen, had agreed to settle insider-trading allegations by writing the Securities and Exchange Commission a check for $602 million. As usual, the deal included the "neither admit nor deny" language that has become standard for settlements with the SEC and other federal regulators.

Marrero found that odd. "There is something counterintuitive and incongruous about settling for $600 million if it truly did nothing wrong," he said at a Federal District Court hearing last week in Manhattan.

Judges have been increasingly willing to question the "neither admit nor deny" deals since Judge Jed S. Rakoff refused to approve a $285 million settlement in 2011 between the SEC and Citigroup over allegations of mortgage fraud.

In December 2011, Judge Rudolph T. Randa, a federal judge in Wisconsin, questioned an SEC settlement with the Koss Corporation, the Milwaukee-based headphone manufacturer, in which the company didn't admit or deny wrongdoing (though he ultimately approved the settlement.) Two months later, Judge Renee Marie Bumb blocked an $11.5 million settlement between the Federal Trade Commission and a New Jersey marketing company that also used "neither admit nor deny" language.

"They've asked more questions, they've taken more time," Thomas O. Gorman, a partner at Dorsey & Whitney who specializes in securities law, told ProPublica.

But it's far from certain whether judges actually have the power to block such settlements.

More than a year after Rakoff's decision, the Court of Appeals for the Second Circuit in New York is still weighing whether his ruling was the right one. When the case is decided, Donald Langevoort, a Georgetown University law professor who specializes in securities law, told ProPublica, "it will basically give marching orders to Judge Rakoff and the others."

A preliminary ruling by the appeals court last year, however — which stayed Rakoff's ruling pending a full appeal — suggests that Rakoff and his fellow judges are standing on shaky ground. We've taken a closer look at that ruling for hints as to where things are headed.

In his decision, Rakoff wrote that the Citigroup settlement is "neither fair, nor reasonable, nor adequate, nor in the public interest." Here's the crux of his argument:

Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards. 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.

When it reviewed the ruling, the appeals court largely sidestepped this piece of Rakoff's argument. Instead, the court argued that Rakoff had made the mistake of assuming the SEC could have prevailed if it had gone to trial against Citigroup:


The court also argued that it was not Rakoff's place to determine good policy for the SEC. (The agency has repeatedly defended its "neither admit nor deny" strategy. "On balance, I continue to think that's the right policy," Robert Khuzami, the SEC's former head of enforcement, said at a conference on Tuesday.)


And the court suggested that it was unrealistic for Rakoff to think that Citigroup would have agreed to any kind of settlement in which it had to admit wrongdoing:


The appeals court concluded that Rakoff's decision was likely to be overturned:


The Court of Appeals ruling did note that judges don't have to "rubber stamp all arguments" made by the SEC and other agencies, but that they shouldn't reject a settlement negotiated by an agency "without substantial reason for doing so."

The court is expected to rule on the full appeal sometime this year.

Settlement shouldn’t be allowed in criminal cases, period.  There is no advantage to anybody but the criminal to abandon a case without a verdict to convict or exonerate.  Justice isn’t about getting revenge, but it’s also not about paying cash to erase crimes.  Most civilizations would consider that bribery, rather than justice.

That, in itself, should be “substantial reason” to throw out a settlement.

It has to be blackmail on the part of the S.E.C. Or as stated earlier bribery! The “neither admit nor deny” has been the core of grease in the slippery slope American Corporations have used to repeat offenses over and over with just paying a fine. In most cases the fine is an extremely small percent of their reveue (A few days or a weekend of revenue). And they chalk it up as a cost of doing business!  What the goverment needs here is a provision in stock options for executives running these companies that any major fine to tthe S.E.C. or the Dept of Banking and they lose 25% of their stock options across the board. And the options lost become part of the fine.  And they cannot receive new options for 5 years! They need their feet put to the fire!

Amen to both comments above.  The thieves will continue because the corporation paid their fine!  Corporations are inherently dishonest because they are created to avoid responsibility and liability.  Make those suckers pull the “dough” out of their pockets and the thievery will stop!

The quoted above that judges “shouldn’t reject a settlement negotiated by an agency ‘without substantial reason for doing so.’” Creates a catch 22 for judges that are not part of the negotiations for settlement, apparently have no right to know the facts , or if they know the facts , have no right to the evidence supporting those facts, and therefore have no useful information (they are not informed) on which to either accept or deny such settlement agreements. This is counterintuitive to the good administration of justice. There should be at the very least a criminal preliminary hearing type of action so the judge can determine for him or herself if the settlement is reasonable. To hog tie judges to the expedience of the executive branch that is beholding to large donors like these companies mentioned in the article is ridiculous.  We are requiring our judges to be Third Reich like judges rubber stamping the action of the executive branch, at a time that there are few federal judges willing to stick their necks out anyway to protect the public, this appeals court needs to support its judge, not Obama.

In concurrence with the above comments I have a question regarding the dispensation of the funds received by the government in such settlements.  Where do these funds go and by what authority?  The attempt to starve agencies like the SEC so has to weaken their ability to attract and hire skilled, dedicated prosecutors is well known.  If these sums were allocated to the Federal Agency, their might be at least some redeeming value to allowing such settlements.  If the funds become a part of the “general fund” then there is no redeeming value at all that I can find.

Equal justice under the law? In a country with the highest incarceration rate of all “industrialized” countries? Our prisons are full of people who can’t afford to buy the “Get Out of Jail” cards apparently available for purchase by criminal corporate heads.

In other news, remember when we used to put them in jail? Jeffrey Skilling’s lawyers are currently trying to get his 24 year prison sentence reduced. (He’s been in jail for fraud and conspiracy since 2006 due to his role in bringing energy giant Enron down.)

The essence of punishment is to deter the individual from committing the same acts again and if a crime has been committed to stop the individual from committing the crime again.  How does the judicial system achieve punishment by rubber stamping settlements that do not accept any kind of wrongdoing?

The SEC is basically allowing, in this case Citi and SAC, to go free of any punishment in exchange for a sum of money.  How in the world is this OK?

Follow the money. Where do the settlement dollars end up?

Let me get this straight.  Rich mobsters are above the law and the ladies and gentlemen of the Court of Appeals, 2nd Circuit are making sure it stays that way.  Are they scared to take on the mob, or are they hoping they’ll get something out of it?  Which is it? 

In the late 1990s, people in Sicily rose up against the mobsters who had terrorized everyone and destroyed everything good for generations. Americans need to do the same against the banking mobsters.

No “settlements” for criminal cases? Think about what you’re saying. That would mean no plea bargains, which are only a specific kind of deal. Every street level drug dealer would have to go to trial, and the taxpayers would pay for his representation.

The problem with the SEC’s deals is that they erase the very idea of crime, punishment and deterrence.  THAT is what should be done away with, not prosecutorial discretion.

Insider trading shouldn’t be a crime anyway. And the government could use the 600 mil - will help lower taxes. Take it and roll.

As for the rest of you whine about criminal cases - your just pissy and angry and that your life is not as good as Cohen’s. Well - too bad - your life never will be - and wishing ill on others will still not make you happy. Get a clue. 

The prosecutors working for the Fed are making more than you, drive nicer cars, have much better educations and will have much better careers. Why are you not angry at them?  Because you are a liberal shill and believe everything the media tells you.

Sean…you bone head.  Are you one of the wall street thieves or was it yo Daddy?  The S.O.B.s need to be in prison…the rest of us would be!!  Sorry about talking ‘bout yo dad that way but…

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