On June 6, 2014, Osler commented on a recent decision of the U.S. Court of Appeals for the Second Circuit on the court’s role in reviewing “no-contest” settlements (consent decrees) entered into by the SEC and alleged wrongdoers. In its decision, the Appellate Court held that Judge Rakoff of the U.S. Southern District Court of New York “abused his discretion” by refusing to approve a settlement between the SEC and Citigroup Global Markets Inc. (Citigroup) in which Citigroup neither admitted nor denied the SEC’s accusations. The Appellate Court also held that Justice Rakoff applied the wrong legal standard by requiring the SEC to establish the truth of the allegations made against Citigroup as a condition for approving the proposed settlement. The settlement was sent back to the lower court for reconsideration.
While proponents of no-contest settlements have expressed their approval of the Appellate Court’s decision – lauding the fact that such settlements represent a pragmatic way to drive compliance and business practice improvements – there has been much criticism from other interested parties, including certain securities law experts, who are fearful of what the implications might be on a court’s ability to protect the public interest. Much of the criticism is focussed on the Appellate Court’s rejection of Justice Rakoff’s finding that a court cannot determine if a proposed settlement is “fair and reasonable” without the benefit of knowing any of the facts related to the alleged wrongdoing. The Appellate Court’s decision, critics say, makes it next to impossible to review proposed no-contest settlements.
The Appellate Court’s decision has already been applied by another District Court judge in regard to the SEC’s $600 million insider trading settlements between the SEC and affiliates of CR Intrinsic Investors LLC (CR Intrinsic) and SAC Capital Advisors LP. Judge Morrero, initially took issue with the “no admit, no deny” settlement policy, but ultimately granted approval of the settlements conditional on the decision of the Appellate Court in the Citigroup case. Despite ultimately approving the settlements, Judge Morrero’s decision noted a seeming contradiction: “a declaration by sophisticated defendants claiming they committed no wrongdoing that flies in the face of their unusual swift capitulation, and appears at odds with their acceptance of responsibility to pay disgorgement amounts and penalties of such staggering amounts”. Judge Moreno also called for a “more rigorous inquiry by the SEC” in its application of no contest settlements in light of the results of the parallel criminal cases, which resulted in the conviction of CR Intrinsic’s portfolio manager, and a guilty plea by CR Intrinsic itself. Judge Morrero’s decision suggests that despite the Appellate Court’s instruction in the Citigroup case of the court’s role in approving proposed no-contest settlements, there still remains a reluctance from the judiciary to approve such settlements without at least voicing its concerns.
It is apparent that the debate about the court’s role in reviewing no-contest settlements is not waning, and the Citigroup decision and subsequent decisions applying it will likely have an impact on Canadian securities regulation going forward. This is particularly so in Ontario where OSC Staff, in March 2014, announced that it had amended its Credit for Cooperation Program to permit, in “limited circumstances,” alleged wrongdoers to settle cases launched against them without admitting to any “facts or liability”. The OSC Staff proposal has been strenuously debated since it was first introduced in 2011.
The OSC has yet to consider a no-contest settlement proposed by Staff. Time will tell how no-contest settlements will operate in the Ontario context, and whether the controversy surrounding the Citigroup decision will impact the Commission’s view on no-contest settlements. Additionally, it will be interesting to see if other security regulators in Canada choose to adopt policies similar to the Ontario’s, permitting no-contest settlements of some kind.
Image courtesy of Flickr by Scott S