In November 2011, U.S. Judge Jed Rakoff was engaged in a high-profile, but seemingly quixotic, mission to upend the Securities and Exchange Commission's standard settlement practices by refusing to approve its proposed $285 million settlement with Citigroup.

In a decision that sent shock waves through the SEC and Wall Street, Rakoff concluded that he would not be a “rubber stamp” and would not approve the settlement because the court had “not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment.” Many asked whether one lonely federal judge could put an end to the three-decade old SEC practice of allowing defendants to settle charges without admitting or denying any wrongdoing.

Although Rakoff's decision was a jolt to the SEC, it was then still just a single judge making life difficult for the agency. But things have changed. In less than a year and a half, at least four other federal judges have now rejected or raised serious concerns about proposed SEC settlements in which the defendants are not required to admit any wrongdoing. What was until recently just a single voice has now become a small but quickly growing chorus critical of the SEC's long standing settlement policy.

The most recent judge to raise concerns about the SEC's “neither admit nor deny” settlement policy is U.S. District Judge Victor Marrero of the Southern District of New York. Last month the SEC announced that it had filed a lawsuit against hedge fund advisory firm CR Intrinsic Investors alleging that CRII participated in an insider-trading scheme involving a clinical trial for an Alzheimer's drug being jointly developed by two pharmaceutical companies. The SEC trumpeted in a press release that CRII, an affiliate of billionaire Steven Cohen's S.A.C. Capital Advisors, had agreed to pay more than $600 million to settle the agency's lawsuit—the largest settlement the agency had ever obtained in an insider-trading case.

Not so fast. Less than two weeks later, Marrero showed that he shared the same concerns as his SDNY colleague, Judge Rakoff. In a March 28 hearing in which both parties sought approval for the settlement, Marrero expressed his concerns that the settlement permitted S.A.C. to avoid acknowledging that it did anything wrong. Although S.A.C. argued that agreeing to the settlement simply reflected a business decision to avoid having litigation hang over its head for years, Marrero reserved judgment on the request for approval. The judge told the parties that “there is something counterintuitive and incongruous about settling for $600 million if [S.A.C.] truly did nothing wrong.”

Marrero did not say when he would issue his ruling on the settlement, but suggested that he might condition approval on the outcome of an appeal to the U.S. Court of Appeals for the Second Circuit that is now pending in the Citigroup case. In that case, in which oral argument was heard in February before a packed courtroom, the Second Circuit will rule on whether Rakoff exceeded his authority when he rejected the SEC's settlement with Citigroup. That appeal “will be very much pertinent to what the court has been asked to do here,” Marrero stated.

If the “ground is shaking” beneath the SEC's policy of allowing defendants to settle cases without admitting any wrongdoing, as Marrero suggests, then the Second Circuit's ruling in Citigroup could be particularly significant.

The SEC argued at the March 28 hearing on the S.A.C. case that because the Citigroup appeal will not specifically address the issue of whether a judge may approve a settlement containing a “neither admit nor deny” provision, there was no “unsettled question” to prevent the court from ruling in the S.A.C. case. “The ground is shaking. Let's admit that,” Marrero countered. “This court is in the same position that Judge Rakoff was some months ago.”

With his decision to question the neither-admit-nor-deny-wrongdoing clause, Marrero joins a growing number of jurists who have followed Rakoff's lead in refusing to rubber-stamp SEC settlements, including:

·         U.S. District Judge Rudolph Randa (Eastern District of Wis.): In December 2011, Randa refused to approve a proposed settlement in SEC v. Koss, and ordered the SEC to provide a “factual predicate” for the settlement of its accounting fraud charges.  Judge Randa found that the proposed settlement did not provide sufficient information to support the agreed-upon penalties against Koss CEO Michael Koss.  In February 2012, after the SEC agreed to submit revised final judgments, Randa stated that he would no longer withhold his approval of the settlement.

·         U.S. District Judge Frederic Block (Eastern District of N.Y): In February 2012, Block was asked to approve a $1 million settlement between the SEC and former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin. Referring several times to Judge Rakoff, Block wondered aloud during the approval hearing “at what the role of the court is when the court is being asked to sign off and give its consent to your arrangement … Am I just a rubber stamp here or is there some inquiry I ought to be making about these provisions? About the fairness of it? Or the reasonableness of it?” Block then required all of the parties seeking approval of the settlement to submit briefs specifically explaining why the relatively small penalties in the settlement were adequate.  In June 2012, Block begrudgingly approved what he called a “chump change settlement,” and complained of the “relative impotence” of the SEC “in the face of Wall Street wrongdoing.”

·         U.S. Senior District Judge John Kane (District of Colo.): In January 2013, Kane refused to approve the SEC's proposed $12 million settlement with Bridge Premium Financial and one of its former executives concerning an alleged Ponzi scheme. Taking a hard line against the standard “neither admit nor deny” settlement proposed by the parties, Kane wrote that he would not “approve penalties against a defendant who remains defiantly mute as to the veracity of the allegations against him. A defendant's options in this regard are binary: He may admit the allegation or he may go to trial.” Kane added that he would still be willing to “entertain” any future motions that the parties chose to file that omitted this “unacceptable language.”  The case docket shows that the court approved a final judgment in the case against the company last month.

If the “ground is shaking” beneath the SEC's policy of allowing defendants to settle cases without admitting any wrongdoing, as Marrero suggests, then the Second Circuit's ruling in Citigroup could be particularly significant. It is unclear, however, if the Second Circuit will specifically address that issue in its decision. Although this policy question surely lurks in the background of the entire dispute, the parties differ on what the specific issues presented for the Second Circuit to resolve are. In its appeal brief, the SEC argued that the issue is whether Rakoff erred in rejecting the Citigroup settlement because it was not based on facts “established by admissions or by trials.”

Rakoff, however, argued in his brief that the court never stated that it was withholding approval unless liability was conceded, proved, or somehow “conclusively determined.” Rather, he argued, the court was unable to independently determine whether the proposed settlement should be approved because “it had not been provided with any ‘evidentiary basis,' any ‘factual base,' ‘any proven or acknowledged facts,' or any other factual showing whatsoever on which to make the requisite determination.”

So while a growing number of judges are keeping a close eye on the Second Circuit's decision in the Citigroup case, it remains to be seen whether that ruling will put the issue of the SEC's use of “neither admit nor deny” settlements to rest or not.