Federal judge Jed Rakoff made waves in November 2011 when he rejected a proposed neither admit nor deny consent decree between the Securities and Exchange Commission (SEC) and Citigroup, ruling that the settlement was “neither reasonable, nor fair, nor adequate, nor in the public interest.”

Now, the Second Circuit has overturned Judge Rakoff and let the SEC Citigroup settlement stand.

But it didn’t give the SEC a blank check to settle corporate wrongdoing cases as they wish.

The Second Circuit decision pivoted on the question of “what deference the district court owes an agency seeking a consent decree.”

The Second Circuit declared that the proper standard for “reviewing a proposed consent judgment involving an enforcement agency requires that the district court determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the ‘public interest would not be disserved.’”

The appellate court omitted “adequacy” from the standard, saying it was more appropriate for a review of class action settlements than with consent decrees.

“The appeals court today rejected the SEC’s extreme position that courts merely rubber stamp whatever settlement the SEC files,” said Dennis Kelleher of Better Markets, an independent nonprofit organization that promotes the public interest in the financial markets. “The appeals court correctly ruled that to do what the SEC was really asking for here would be a ‘dereliction of the court’s duty.’ That is a victory for investors, our markets and the public interest.”

“The appeals court also endorsed the key principle that district courts have the power and authority to obtain and establish a sufficient factual basis to evaluate any proposed settlement,” Kelleher said. “Indeed, in this case, the appeals court approved the District Court’s requiring the parties to provide extensive additional information. That is essential if courts are to provide transparency, oversight and accountability in connection with SEC settlements that often impact tens of millions of Americans and tens of billions of dollars. This is the crux of the appeals court’s decision that district courts must ensure that such settlements are not only fair and reasonable, but also do not disserve the public interest.”

“Importantly, the appeals court expressly acknowledged that the District Court must ensure that the SEC settlement is not the product of collusion. As we set out in our briefs, there is evidence that there was collusion here and potentially an effort to mislead the court as to the scope and terms of this settlement with Citigroup. The recent reporting about possible collusion in the SEC settlement with Goldman in the Abacus case makes this requirement imperative and we look forward to the district court’s further proceedings and analysis on this point.”

Earlier this year, Better Markets Better Markets filed a lawsuit challenging the Justice Department’s authority to unilaterally enter into the unprecedented and historic $13 billion agreement with JP Morgan Chase, which was the largest settlement with a single entity in the nation’s history by more than 300%.

The November 2013 agreement gave JP Morgan Chase – with no judicial review or approval – blanket civil immunity for years of alleged pervasive, egregious and knowing fraudulent and illegal conduct that contributed to the 2008 financial crash and the worst economy since the Great Depression.