Friday, November 04, 2011
Shopping for Settlement
Judge Rakoff of the Southern District of New York has hit the papers again as a critic of the SEC's settlement processes, now in the SEC v. Citigroup Global Markets case. (One report here.)
One function of the review process is to publicize SEC settlement practices. The publicity pressure seems aimed at a few SEC practices, including the practice of allowing settlement with the SEC without admitting or denying the allegations. Judge Rakoff's opinions also highlight some fundamental and possibly intractable problems with entity-level punishment. Namely, who pays when a corporation pays a penalty? (probably current shareholders) Does the channeling of fines to injured investors through Fair Funds change anything (my article about this here)? And to what extent should the SEC pursue individuals?
These settlement reviews in high profile cases also force out information about the facts of the particular case. For instance, one result of Judge Rakoff's initial resistence to the settlement in Bank of America was that the Bank ultimately stipulated to certain facts.
So maybe the chance of public judicial criticism constrains agencies. But both of the options currently on the table seem unappealing: judicial rubber stamping on the one hand or unpredictable judicial intervention on the other. The first is unappealing not only because the agency can come back to the court to enforce compliance (which it seems never to do), but also because these agreements implicate regulatory policy, and the agency is officially acting on the public’s behalf.
On the other hand, I'm not sure the extent of scrutiny should depend on a figurative spin of the judicial assignment wheel. (If it does, a useful question for Rakoff-watchers is how his recent change to senior status as a judge affects the case assignment process.) To the extent particular judges are more willing to scrutinize settlements or develop a reputation for rejecting settlements, agencies may forum shop to avoid this scrutiny. In other words, they may shop for settlement. Finally, it may push agencies to select remedies that avoid judicial review.The backstory: This is not the first time Judge Rakoff has scrutinized, initially rejected, and tweaked a settlement, as well as calling the SEC to task in colorful, widely reported language. When Judge Rakoff reviewed the SEC's 2009 settlement with Bank of America, he said agency claims of victory created a “façade of enforcement.” His initial rejection of the Worldcom settlement in 2003 raised the same sort of questions: Who benefits? What changes in corporate governance? How did the SEC come up with this settlement? (rejection here)
The standard of review: These disputes arise in the context of settlement review by judges. Courts review settlements with the SEC to make sure they are “fair, reasonable, adequate, and in the public interest." The caselaw on how to review settlements reflects the hybrid nature of the settlements: they are both court order and contract. Courts that have emphasized the contractual aspect of these agreements have examined primarily whether the contract was made voluntarily; if so, the court declined to redefine the agreed-upon terms. Others have taken a closer look based on the court's continuing monitoring role, although courts often defer to the agency's view of the public interest.
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Thanks so much for this post. As an avid "Rakoff-watcher," I agree that many of the questions raised in Rakoff's October 27 order definitely mirror the questions that he has asked in past cases, most notably Bank of America.
Among other things, I think the "channeling of funds" to private parties raises interesting implications for private class action settlements. As you've pointed out in your (really terrific) Florida Law Review article, agency settlements by the SEC, FTC, EEOC and OCC reflect an emerging trend, where public actors compensate people for privately felt harm. Increasingly, class action attorneys, regulatory agencies, state attorneys general, and even criminal prosecutors commence actions seeking the same funds, against the same defendant, for the same conduct, and on behalf of the same set of victims (but, in some cases, before different judges). As public actors play a greater role in seeking mass restitution for private parties in ways that resemble a class action settlements, we need to come to terms many questions: Who checks against indifference or conflicts of interest among those receiving settlement proceeds? How does the state assure transparency? Who decides on an appropriate way to distribute the settlement award? Should public actors, like federal prosecutors and the SEC, be in the mass compensation-business in the first place?
Judge Weinstein addressed the role of federal judges in policing the growing overlap of the administrative, criminal and civil actions to address mass delicts some time ago. Jack B. Weinstein, Compensation for Mass Private Delicts: Evolving Roles of Administrative, Criminal, and Tort Law, 2001 U. Ill. L. Rev. 947 (2001)). With respect to the question of judicial review, I think judges, like Judge Rakoff and Judge Weinstein, who commonly issue similar orders in such cases, are moving toward a system of "hard look" review which may be appropriate for large agency distribution schemes (although that review may, as you note, impact the agencies' original willingness to seek restitution in the first place). Under hard look review, the court does not scrutinize agency actions de novo or provide a rubber stamp. Instead, the court considers whether the agency justified its decision-making process. In the context of an agency settlement distribution, hard look review would require agencies articulate arguments supporting and opposing the proposed settlement, explain the complex trade-offs made by the agency, and explain the final settlement terms.
Shameless-plug: For what it's worth, I've also argued that courts could use hard look review in agency settlements and non-prosecution agreements involving massive restitution. Adam S. Zimmerman, Distributing Justice, 86 N.Y.U. L. Rev. 500 (2011); Adam S. Zimmerman & David M. Jaros, The Criminal Class Action, 159 U. Pa. L. Rev. 1385 (2011). In both pieces I also suggest that one way to reduce forum shopping would be a mechanism to centralize both public and private mass actions through a procedure that resembles federal multi-district litigation.
Posted by: Adam Zimmerman | Nov 4, 2011 10:38:17 PM
Hi Verity (and Adam). This effort to look hard at SEC enforcement practices could be a really important development if it spreads significantly beyond one or two judges. The academic and public discussions about regulating Wall St. are certainly creating favorable conditions for that to happen. Aside from the important follow-the-money aspects of this, there are fundamental problems with the primary non-criminal enforcer for the securities markets settling all of its big cases and doing so in a form that saps enforcement actions of much substantive message effect. Rakoff's order in the Citi case includes, importantly, a direction that the SEC tell him more about what Citi actually did wrong and why it was only negligence in the SEC's view. Now for my own shameless plug. I explore this in a book chapter, "Potentially Perverse Effects of Corporate Civil Liability," which can be found in a book called Prosecutors in the Boardroom, edited by the Barkows at NYU.
P.S. to general Prawfs readers: Depending on the publisher, beware using the book chapter to talk about developing issues. I wrote this piece before Rakoff got into the BofA matter, and it just came out this year. I was not permitted to post a draft on SSRN, or the final version. The editors gave me ample opportunity to try to change the publisher's position on this, but I failed.
Posted by: Sam Buell | Nov 5, 2011 11:32:30 AM
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