For decades, the SEC has allowed defendants to settle cases without admitting to the agency's allegations. The agency tightened this policy up a bit in 1972 when it declared that "a refusal to admit the allegations is equivalent to a denial unless the defendant or respondent states that he neither admits nor denies the allegations.”

For many years, then, defendants have routinely settled SEC case through this "neither admit nor deny language" that is in many ways a win-win for both parties: the defendants put the case behind them without admitting wrongdoing, which would open them up to potentially huge civil liability; and the SEC gets to bring enforcement actions, collect fines, and hopefully create a deterrent effect without the risk and cost of taking cases trial.

While "neither admit nor deny" settlements may be a win-win for the SEC and defendants, Judge Jed Rakoff of the SDNY continues to question whether this meets the legal standard for judicial approval, i.e., "fair, reasonable, adequate, and in the public interest." Judge Rakoff also continues to question why the SEC often pins responsibility only on the company in general and does not pursue the “culpable individual offenders acting for the corporation.”

The SEC's high-profile battles with Judge Rakoff on these points began with his criticism of its Bank of America settlement in 2009, which he ultimately--and very reluctantly--approved. In March 2011, the SEC again drew Judge Rakoff for approval of a settlement between the agency and Vitesse Corp. and two of its executives. In his opinion, he characterized the SEC's approach as saying, in effect, “[a]lthough we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.” The judge again approved the settlement, but said he was "reserving for the future substantial questions of whether the Court can approve other settlements that involve the practice of 'neither admitting nor denying.'”

I wrote back in March that "the next SEC settlement that is brought before Judge Rakoff could be quite interesting," and that turned out to be accurate yesterday when Judge Rakoff was asked to approve the SEC's recent settlement with Citigroup. This time, Judge Rakoff seems to be gearing up for an even bigger battle, and has ordered the parties to answer nine extremely difficult questions at a hearing on November 9. The questions are:

1) Why should the Court impose a judgment in a case in which the S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?

2) Given the S.E.C.'s statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the S.E.C.'s charges are true? Is the interest even stronger when there is no parallel criminal case?

3) What was the total loss to the victims as a result of Citigroup's actions? How was this determined? lf, as the S.E.C.'s submission states, the loss was “at least” $160 million, what was it at most?

4) How was the amount of the proposed judgment determined? In particular, what calculations went into the determination of the $95 million penalty? Why, for example, is the penalty in this case less than one-fifth of the $535 million penalty assessed in SEC v. Goldman Sachs? What reason is there to believe this proposed penalty will have a meaningful deterrent effect?

5) The S.E.C.'s submission states that the S.E.C. has “identified… nine factors relevant to the assessment of whether to impose penalties against a corporation and, if so, in what amount.” But the submission fails to particularize how the factors were applied in this case. Did the S.E.C. employ these factors in this case? If so, how should this case be analyzed under each of those nine factors?

6) The proposed judgment imposes injunctive relief against future violations. What does the S.E.C. do to maintain compliance? How many contempt proceedings against large financial entitities has the S.E.C. brought in the past decade as a result of violations of prior consent judgments?

7) Why is the penalty in this case to be paid in large part by Citigroup and its shareholders rather than by the “culpable individual offenders acting for the corporation?” If the S.E.C. was for the most part unable to identify such alleged offenders, why was this?

8) What specific “control weaknesses” led to the acts alleged in the Complaint? How will the proposed “remedial undertakings” ensure that those acts do not occur again?

9) How can a securities fraud of this nature and magnitude be the result simply of negligence?

Stay tuned for the answers to these questions. The November 9 hearing should be fascinating.

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