On June 18, 2014, Judge Victor Marrero of the U.S. District Court for the Southern District of New York approved the SEC’s no-admit, no-deny consent decrees in its insider trading case against CR Intrinsic Investors, LLC and affiliated entities.  In approving the decrees, however, the court called on the SEC to take a “wait and see” approach in cases involving parallel criminal actions arising out of the same transactions alleged in its complaint.

The decision follows the much-anticipated opinion in SEC v. Citigroup Global Markets (“Citigroup IV”), in which the Second Circuit vacated Judge Rakoff’s order refusing to approve a no-admit, no-deny consent decree between the SEC and Citigroup.  The Second Circuit found that district courts are required to enter proposed SEC consent decrees if the decrees are “fair and reasonable,” and if the public interest is not disserved.  A court must focus on whether the consent decree is procedurally proper, and cannot find that a proposed decree disserves the public based on its disagreement with the SEC’s use of discretionary no-admit, no-deny settlements.

The consent decrees at issue arise out of the SEC’s allegations that CR Intrinsic participated in an insider trading scheme that generated approximately $275 million in illegal profits and avoided losses.  On the same day that the SEC filed its amended complaint against CR Intrinsic and its affiliates, it filed proposed consent judgments for all of the defendants.  All of the defendants consented to the proposed consent judgments, which found that they were jointly and severally liable for over $600 million.  At the same time, however, one of the individual defendants, Matthew Martoma, faced criminal charges related to the conduct at issue in the SEC’s amended complaint.

In March 2013, the court conditionally approved the consent judgments pending the Second Circuit’s forthcoming opinion in Citigroup IV.  It, however, expressed concern over the “no-admit, no-deny” provisions in the consent judgments, given the pending criminal charges against Martoma, and the defendants’ willingness to pay substantially all of the damages sought.  After the court’s conditional approval of the proposed consent order, a jury convicted Martoma of securities fraud.  Further, the government brought and resolved criminal and civil forfeiture proceedings against several of the defendants in connection with the same transactions.  These actions resulted in the defendants pleading guilty to securities and wire fraud, admitting to the forfeiture allegations, and agreeing to pay $1.8 billion in fees.

Following the Second Circuit’s opinion in Citigroup IV, the court revisited the issue, finding that the proposed consent judgments were “fair and reasonable” and should be approved.   It, nevertheless, noted that the guilty verdict against Martoma and the guilty pleas by certain entity defendants were incongruous with the consent judgments in which the defendants denied wrongdoing. The court stated that the SEC needed to employ “a more rigorous inquiry” in its use of no-admit, no-deny settlements.  It stated that the SEC may benefit from adopting a “wait-and-see” approach when there are parallel criminal cases that track its civil complaints. That way, the court opined, the SEC may use the outcomes of strong criminal cases to achieve settlements that are “more favorable to the public good and the interests of justice.”