As discussed here, a growing number of jurists are following the lead of Judge Jed Rakoff in refusing to approve SEC settlements in which defendants "neither admit nor deny" the agency's charges against them. Most recently, U.S. Senior District Judge John L. Kane (D. Colo.) rejected the SEC's proposed settlement with Bridge Premium Finance and certain of its executives, saying he refused "to approve penalties against a defendant who remains defiantly mute as to the veracity of the allegations against him."

Today, the parties in the Citigroup case in which Judge Rakoff made this a high-profile issue by rejecting a major settlement, as well as counsel for Judge Rakoff himself, appeared for an unusual oral argument before the Second Circuit. The New York Times reports that Judge Rakoff was not present but outgoing Enforcement Director Robert S. Khuzami (on his last day at the SEC) and George Canellos, his acting successor, both attended the hearing.

In the hearing, counsel for both the SEC and Citigroup argued that Judge Rakoff exceeded his authority in rejecting the settlement because he second-guessed the agency's "discretionary and policy-based decision to settle." Judge Rakoff's counsel argued that the judge was not required to automatically approve the settlement. In his brief, Judge Rakoff argued that “the S.E.C.'s and Citigroup's concept of deference – in which courts would be effectively reduced to potted plants – would surely undermine the independence of the federal judiciary.”

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