The Wall Street occupiers had been chased out of Zuccotti Park a couple of weeks earlier, but you could hear the echoes of their frustration in a dramatic ruling issued just a few blocks away on Nov. 28, 2011. The opinion, by Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York, rejected a settlement between the Securities and Exchange Commission (SEC) and Citigroup Global Markets. In doing so, Judge Rakoff directly challenged the practice of negotiated settlements—the primary mechanism for resolving corporate regulatory violations.
The proposed settlement, he wrote, was not reasonable, fair, adequate or in the public interest, for the central reason that it leaves the facts of a particularly egregious chain of allegations shrouded in ambiguity.
That’s heavy stuff, and probably gratifying to the millions of Americans angry at the lack of perceptible accountability for the financial shenanigans that caused or were revealed by the global financial crisis. But the sweeping language of the opinion does more than reject the Citigroup settlement—it calls into question the process by which companies are penalized without admitting guilt. The pending appeal could have far-reaching ramifications for business and regulators alike.
“This has suddenly taken on real importance,” says Logan Robinson, a professor at the University of Detroit Mercy School of Law, and a former auto industry general counsel. “The 2nd Circuit, in making its decision, will not want to make a huge policy change but, nevertheless, it will have to address whether the SEC has the authority to reach settlements with defendants that do not force them to admit liability. I don’t see how it can run away from that.”
The proposed settlement is not at all out of line with the formula the SEC generally uses in such cases: disgorged profits, plus interest, plus a fine based on the probability of prevailing in court. The government gets to state the allegations and allocate some restitution, and the company avoids the secondary litigation and insurance issues that would inevitably follow an admission of guilt.