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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.

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.

Theodoric Meyer

Theodoric Meyer is a former ProPublica reporting fellow. He was previously an intern at The New York Times and The Seattle Times.

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