On August 5, 2014, U.S. District Judge Jed Rakoff reluctantly approved a$285 million settlement in the SEC’s enforcement action against Citigroup.  In SEC v. Citigroup, the SEC alleged that after Citigroup realized in early 2007 that the market for mortgage-backed securities was beginning to weaken, it created a billion-dollar fund to sell some of these assets to investors without disclosing either that Citigroup had exercised significant influence in selecting the assets to include in the fund and had itself retained a $500 million short position in the assets it had helped select.

Judge Rakoff initially declined to approve the proposed consent judgment because he said it lacked “sufficient evidence to enable it to assess whether the agreement was fair, adequate, reasonable, and in the public’s interest.”  He was forced to reconsider that position when the Second Circuit ruled, on appeal, that the “primary focus of the [district court’s] inquiry . . . should be on ensuring the consent decree is procedurally proper, . . . taking care not to infringe on the SEC’s discretionary authority to settle on a particular set of terms.”

In overturning the lower court’s decision, the Second Circuit explained that proof of “adequacy is not required,” in part, because the SEC is politically accountable if it fails to perform its duties.  The court further explained that proof of “fairness” and “reasonableness” requires only that the consent decree is facially clear and lawful, resolves the claims, and is not ‘tainted by improper collusion or corruption.”  Finally, the court cautioned that ensuring that the consent decree serves the public interest is the SEC’s responsibility.

In his August 5 decision, Judge Rakoff openly criticized the “very modest standard imposed by the Court of Appeals,” which primarily focuses on whether a consent judgment is procedurally improper in any material respect.  He denounced this standard for leaving “no meaningful oversight whatsoever” over settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers.

He was further disturbed by the Second Circuit’s invitation to the SEC to avoid any judicial review by proceeding on an administrative basis, describing the result as an “unchecked and unbalanced administrative power” and suggesting that it was therefore without “constitutional warrant.”

However, he ultimately acquiesced to the Second Circuit’s dictates, and approved the settlement.  Judge Rakoff’s grapes of wrath were not ripe enough to disobey the Second Circuit’s mandate.