Judge Victor Marrero On SEC Neither Admit Nor Deny Consent Decrees — The Ground is Shaking, There Are Tremors

First there was Judge Jed Rakoff.

Then Judge Richard Leon.

And now comes Judge Victor Marrero.

All have stood up and questioned the Securities and Exchange Commission’s (SEC) policy of allowing corporate wrongdoers to settle cases with consent decrees that allow them to “neither admit nor deny” wrongdoing.

In a hearing last week in New York, Judge Marrero was asked to approve a $600 million settlement between the SEC and a CR Intrinsic Investors, a unit of Steven Cohen’s hedge fund SAC Capital Advisors.

Judge Marrero rejected the idea that the judiciary is a rubber stamp for government settlements.

“The Court cannot conceive that Congress intended the judiciary’s function in passing upon these settlement agreements as illusory, as a predetermined rubber stamp for any settlement put before the Court by an administrative agency or even a prosecutor,” Judge Marrero said. “Such a conception of the Court’s role would make a mockery out of congressional intent and judicial independence.”

“In the case before it, for example, what if the parties’ proposed settlement charges entailing illicit insider gains of $600 million for $99.98, or if the settlement were tainted by conflict of interest or otherwise corrupted,” Judge Marrero said.

“Of course, these are extreme illustrations, but it does exemplify the point that somewhere in the financial spectrum between zero and $600 million, between turning a blind eye and effective oversight, there is a band in which the Court’s public role must become more vigilant and robust.”

“Coming closer to home to the facts of this case, the Court has examined the settlement numbers proposed by the parties and the justification and analysis offered in support of them. It is clear to the Court that the settlement before it is not of the $99.98 variety and that the Court lacks the legitimate basis to question the adequacy of this amount proposed or to judge the SEC’s decision to end the litigation for the amount proposed as irrational or arbitrary.”

Judge Marrero then turned to the question of the “neither admit nor deny” clause in the consent decree.

“The Court also notes that the settlement contains provisions in which the settling defendants neither admit nor deny wrongdoing,” Judge Marrero said. “In effect, they do not admit or deny the allegations contained in the SEC’s complaint.”

“The Court recognizes that there are circumstances in which it is perfectly reasonable for parties to a dispute to assist them such provisions. The parties settle for a variety of reasons, among them to avoid undue expense, undue business exposure, to save the cost of approving culpability. A government agency may deem it appropriate to agree that the defendants not admit or deny allegations in the complaint.”

“But that too needs to be put into context. A defendant charged with, for example, wrongful conduct amounting to $10 may be prepared to settle for $3 if not allowed to admit or deny the allegations. At the same time, the agency may deem it appropriate to settle if it would cost $5 to litigate and there is a risk of losing. But there is something counterintuitive in a party agreeing to settle a case for $600 million that it might cost it let’s say $1 million to defend and litigate if it truly did nothing wrong.”

A co-defendant in the case, SAC Capital portfolio manager Mathew Martoma was indicted last year. Martoma pled not guilty and has not reached a settlement with the SEC.

“What if Mr. Martoma were convicted next week or next month of the criminal charges against him and the facts proved at the criminal case established the wrongdoing alleged by the SEC in this case against the SAC defendants in such a way that those findings may have res judicata or collateral estoppel effect?” Judge Marrero asked.

“How would it look if in this settlement the parties were allowed in essence to say we did nothing wrong?”

“It is for these reasons that courts not only in this district but other districts have wrestled with this question of a condition of a settlement that provides that the defendant, settling defendant does not admit or deny the allegations of the complaint, in essence, said it did nothing wrong,” Judge Marrero said.

“The Court cannot ignore also that this issue is currently under consideration by the Second Circuit in the SEC Citigroup case and that the Second Circuit’s ultimate decision in that case must have some bearing, some consideration in how the Court treats the issue before it, recognizing again that is another case, but, nonetheless, very, very much pertinent to what the Court is being asked to do here. In that event, the Court considers that a proper way of addressing the issue might be to condition any approval that it gives to the settlement in this case upon whatever disposition comes out of the Second Circuit in precisely the issue now before this Court.”

“Again, how would it look if this Court were to say this provision is perfectly okay in this case if the Second Circuit were to rule in the SEC case before it that Courts can indeed not accept this formulation in this type of settlement in an appropriate circumstance. On the other hand, the Court is mindful that it cannot reject this condition out of context if in fact next week or next month the Second Circuit were to rule that the Court had no authority to reject such condition.”

The SEC’s attorney at the hearing, Charles Riely, said that the SEC’s neither admit nor deny policy is in place “so we can get that relief quicker and also devote our resources to other cases.”

“The no admit no deny question is a difficult question, but it’s a policy judgment made by our agency,” Riely said. “And it’s not unique to the SEC. Many other federal agencies have made similar judgments. And it is not a new practice. It is a practice that has been in the common law for hundreds of years. And judges have approved consent judgments over and over.”

Riely said that in the Second Circuit’s preliminary decision in the Citigroup case before Judge Rakoff, the appeals court “observed that ‘we doubt whether it lies within the Court’s proper discretion to reject a settlement on the basis that liability has not been conclusively determined.’”

“And so applying that history of the no admit, no deny provision, and the Second Circuit’s guidance in applying it to this case, we do not think that it should prevent the approval of the settlement,” Riely said.

“There is a preliminary ruling, but you also say that’s not the final word. Now, what happens if, tomorrow, a different panel of the Second Circuit says the first panel got it wrong?” Judge Marrero asked.

“Your Honor, there is always a risk of the legal landscape changing. And the point I was trying to make is that the legal landscape, right now, is not unsettled,” Riely said.

“It is not unsettled, but it is also not settled,” Judge Marrero shot back. “The ground is shaking, let’s admit that. . .There are tremors.”

Judge Marrero asked Riely — “What happens if, in a courtroom across the hall Mr. Martoma is convicted in a criminal case of precisely the charge of conduct that you are alleging here, not only against him but against the SAC defendants?”

“And the facts alleged by the Commission are proved in that criminal case. What does it make of your settlement in which these defendants say they did nothing wrong? They either admit or deny what is being proved, or what might be proved across the hallway here?”

“I am not suggesting, Mr. Riely, that you are saying that they didn’t do anything wrong,” Judge Marrero said. “I’m just laying out a circumstance in which the no admit no deny language may be somewhat different from the run of the mill cases in which it may be appropriate.”

One of the attorneys for the defendant, Martin Klotz of Willkie Farr & Gallagher, said that the company paid the $600 million while neither admitting nor denying the allegations “because we have a business to run, and we don’t want to have this litigation hanging over our heads for, potentially, years.”

“We want to put this behind us,” Klotz said. “Now, your Honor said we should not be allowed, making a settlement of this size, to say we did nothing wrong. We’re not allowed to say that, we’re noting that. We’re not saying that we deny the allegations of the complaint, and we wouldn’t be permitted to. All we’re saying is we’re not in a position to admit the allegations of the complaint, but we’re prepared to settle for a large amount of money for good and sufficient business reasons.”

“We would like to settle the case now,” Klotz said. “We don’t want to have this hanging over us. We don’t know when the other case is going to go to trial. It may not be in a few months. It may not be until next year. And we would like to get on with business. It is possible that in that case the jury could find Mr. Martoma guilty, and that would establish one set of facts. It’s possible that the proof in that case would fail, and there would be a different outcome. And that’s why people settle cases. Because they don’t want to spend time and money and, most importantly, they don’t want the risk of that hanging over them.”

The SEC’s consent decree policy will be addressed at a May 3 conference at the National Press Club.

The title of the conference is – Neither Admit Nor Deny: Corporate Crime in the Age of Deferred Prosecutions, Consent Decrees, Whistleblowers and Monitors.

Copyright © Corporate Crime Reporter
In Print 48 Weeks A Year

Built on Notes Blog Core
Powered by WordPress