This post was written by Amy J. Greer.

Once again, Judge Jed Rakoff has proven to be a thorn in the side of the SEC, rejecting the agency’s $285 million settlement with Citigroup Global Markets. While Judge Rakoff’s opinions are always a good read: sharp, well written, and to the point – and this one is posted at the SDNY website and also available here – one can’t help but wonder whether his effort to bring sunshine to the process so as to further his view of the public’s interest in these proceedings won’t have precisely the opposite result.

Using the hook of the injunctive relief incorporated into the settlement as the touchstone for his analysis of whether the public interest is served by the settlement proffered, Judge Rakoff concludes that the settlement “is neither fair, nor reasonable, nor adequate, nor in the public interest. Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards.” Opinion at p. 8. This really gets to the meat of Judge Rakoff’s concern: that a party can settle an SEC enforcement action without admitting or denying the underlying allegations. Apparently, in Judge Rakoff’s view, these missing admissions would provide the Court with the facts needed to decide the propriety of the settlement.

While I concede that in certain circumstances this long-standing SEC policy is silly: when I was at the agency, I recall inquiring why the policy applied to convicted felons, for example, who were willing to consent to the entry of SEC judgments after their criminal convictions, a question I still have today. In most circumstances, however, the analysis is no different than in the settlement of any civil matter. Defendants settle cases – including SEC cases – for a multitude of reasons, many of which have nothing to do with whether or not they actually engaged in the conduct alleged. The SEC settles cases for a similar wide range of reasons, including the fact that they simply cannot try every case, and losing cases is decidedly not good policy, makes for bad precedent, and does not serve to deter future conduct.

Just as the settlements of private civil litigation would stall if admissions were required for settlement, significantly fewer SEC enforcement cases would settle if defendants had to admit to any of the alleged conduct. Just like in private civil actions, many defendants do not agree with the SEC’s conclusions, as alleged in the Complaint, and settling parties tend not appreciate the ability of non-parties to seize upon such admissions to further their own causes.

Notwithstanding Judge Rakoff’s suggestion that “knowing the truth” is the overriding public interest to be served by SEC settlements (Opinion at p. 15), in fact, that is the interest served by confidential SEC enforcement investigations, where neither the public nor the Court has any participation. Once that truth is known, the agency then takes the information and undertakes a necessary calculation to serve its true mission, which is to protect investors; sometimes settling cases, sometimes taking defendants to trial. One wonders whether a forced trial can ever be the right outcome, as Judge Rakoff has accomplished here.

But, of course, to achieve its mission of protecting investors, the SEC does not really need Judge Rakoff and I suspect that what we will see is less use of the courts and, so, less public participation in the process. The SEC can just as easily resolve any enforcement matter it chooses to bring in an SEC administrative proceeding, without any of the drama and uncertainty.