On April 16, 2013, Judge Victor Marrero conditionally approved a $600 million consent judgment between the SEC and CR Intrinsic Investors LLC (“CR”) where CR “neither admitted nor denied” the allegations brought against it. The settlement was on the heels of a highly publicized investigation and lawsuit regarding CR’s purported insider trading scheme involving S.A.C. Capital Advisors and former S.A.C. trader Mathew Martoma. Despite finding the proposed injunctive and monetary relief “fair, adequate, and reasonable, and in the public interest,” Judge Marrero questioned the appropriateness of the “neither admit nor deny” provisions because of the extraordinary public and private harm caused by CR’s alleged wrongful conduct.

Approval of the CR settlement was conditioned upon the outcome of the pending Second Circuit appeal in S.E.C. v. Citigroup Global Markets, Inc., 11-cv-5227 (2d Cir.). In Citigroup, Judge Rakoff (of the Southern District of New York) denied approval of the SEC’s proposed settlement of fraud charges against Citigroup. Rakoff’s opinion harshly critiqued the agency’s use of “no admission” settlements as imposing “substantial relief on the basis of mere allegations.” He questioned whether “no admission” settlements could be properly judged when the Court did not know the relevant facts and therefore “lack[ed] a framework for determining adequacy.” Both Citigroup and the SEC appealed Rakoff’s decision to the Second Circuit, where the decision remains pending.

While giving deference to the Second Circuit’s forthcoming ruling via the conditional approval, Judge Marrero noted that, given the current financial environment, district courts should scrutinize “neither admit nor deny” provisions in certain “extraordinary circumstances,” such as those alleged against CR. To do so, he suggested that a court should evaluate the magnitude of the harm, the extent to which the wrongdoers benefitted, and the severity of the alleged wrongful conduct in determining whether to accept or reject a settlement containing such a provision. Marrero recognized that “in many, if not most, cases, ‘neither admit nor deny’ provisions are essential” and therefore should not cause a settlement to be rejected.

The impact of Judge Marrero’s opinion will largely be determined by the Second Circuit’s decision in Citigroup. If the Second Circuit rejects the type of scrutiny proposed by Marrero, “neither admit nor deny” settlements will continue to be routinely approved. In light of the growing hostility towards such settlements, however, it is unlikely that the Second Circuit will place an outright ban on such review. Instead, it will likely allow courts to reject settlements where the allegations are “neither admitted nor denied,” at least in extraordinary circumstances.

If courts began rejecting “no admission” provisions, and instead required defendants to admit to wrongdoing, it would severely curtail the SEC’s ability to resolve cases. Litigants are often unwilling to admit wrongdoing not only because of reputational harm, but because of the impact on existing litigation, risk of inducing additional lawsuits, and preclusion of insurance coverage, among other things. Without “neither admit nor deny” settlements, the SEC would lack a significant component of its enforcement mechanism – the SEC settles an average of 680 cases per year, while only 15-20 go to trial.