In Rakoff's wake, SEC may settle matters out of court

Commission asks Congress for powers to handle cases administratively; no risk of consent agreements

Dec 1, 2011 @ 12:01 am

By Liz Skinner

Judicial approval gumming up the works for Schapiro & Co. (Photo: Bloomberg News)
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Judicial approval gumming up the works for Schapiro & Co. (Photo: Bloomberg News)

The Securities and Exchange Commission appears likely to pursue more cases administratively as a result of a federal judge's decision this week to reject a $285 million settlement with Citigroup Inc. In the wake of the reversal, the agency is also asking Congress for more powers to penalize and to enforce its own deals.

U.S. District Judge Jed Rakoff in the Southern District of New York on Monday rejected the SEC's settlement with Citigroup Inc. over a mortgage-backed investment fund.

In explaining his ruling, the judge questioned the longstanding SEC policy of allowing companies to settle claims without admitting or denying wrongdoing.

He said a lack of admission of facts by Citigroup made it impossible for him to determine whether the proposed settlement was in the public interest. Mr. Rakoff scheduled a July trial.

It's unclear yet whether the commission will appeal Mr. Rakoff's decision, pursue the Citigroup case through trial, or hammer out a new settlement that's palatable to Mr. Rakoff. But in handling future cases, lawyers said the SEC may well try to keep more settlements in-house, rather than risk consent agreements that must be approved by a federal judge.

The commission is asking Congress for additional statutory authority to bring fines and enforce sanctions itself. On Monday after Mr. Rakoff rejected the Citigroup deal, SEC Chairman Mary Schapiro sent a letter to the head of a congressional panel on securities asking for Congress to approve additional statutory powers for the commission.

One proposed change would boost the penalties SEC could charge for the most serious violations to $1 million per offense for individuals and $10 million for entities. Another change would be in the calculation of “gross pecuniary gain” and would eliminate the disparity between the penalty relief available in the district court and through administrative proceedings, the SEC said. The SEC also asked to be able to calculate a penalty based on “investor losses.”

In addition, the commission wants to be able to charge repeat offenders monetary penalties “over and above” the base amounts if someone has had a judgment or conviction against them in the previous five years. Finally, the commission asked for enhancements to its ability to penalize someone who violates a federal court injunction or bar that has been imposed by the commission.

One major difference with a court-approved deal is that parties who break the deal can be held in contempt of court, said Steve Thel, professor at Fordham University Law School. Parties are more likely to comply with a court injunction than a contract, which is essentially what an administrative agreement entails, he said.

The additional statutory authority the SEC is asking for from Congress, if granted, would strengthen the SEC's hand in the administrative cases it brings, said Stephen Crimmins, a partner at K&L Gates LLP and former deputy chief litigation counsel in the SEC's Enforcement Division.

“If they pursue settlements as an administrative proceeding, those just have to be approved by the commissioners,” he said.

SEC spokesman John Nester declined comment on whether the SEC will pursue additional administrative resolutions. But SEC enforcement director Robert Khuzami said the commission's present settlement provisions which allow a firm to “neither admit nor deny” allegations, enable the commission to efficiently extract disgorgement, monetary penalties and business reforms from firms without the risk, resources and time involved in pursuing litigation.

“We will continue to review the court's ruling and take those steps that best serve the interests of investors,” he said in a statement.

Tom Gorman, a partner at Dorsey & Whitney LLP, said the SEC may expand its use of the administrative forum for smaller cases, such as those against investment advisers. Though he expects for large, market manipulation cases the commission will continue to seek injunctions through the courts.

The SEC has 60 days to appeal Mr. Rakoff's decision, but securities lawyers said they don't think the commission will do so because they risk losing that appeal and then the government's longstanding approach to settlements that allow firms to skirt the admission of guilt issue would be up in the air.

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