SEC Accountability and the Encroaching Administrative State

JURIST Guest Columnist Michael Macchiarola of the City University of New York School of Law says that several recent cases involving the Securities and Exchange Commission may present an opportunity to reevaluate the judiciary's deferential approach toward settlements made between administrative agencies and private parties...
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Over the past several years, in a string of opinions, Judge Jed Rakoff of the US District Court of the Southern District of New York has emerged as a minor cult hero for daring to challenge the creep of a single agency of the administrative state. Specifically, the judge has questioned the wisdom of the long-running settlement practice of the Securities and Exchange Commission (SEC). Since 2009, in three separate opinions, the judge has rejected individual settlements between the Commission on the one hand and Bank of America, Vitesse Semiconductor and Citigroup on the other. The opinions shed light on an unchecked practice which, for too long, has taken the judiciary for granted — involving the court as an ongoing monitor without providing a full accounting of the underlying facts justifying the court's involvement. Absent such a showing, it remains quite difficult for a court to determine its proper role in such a scheme, or whether any public interest is served by its ongoing entanglement. The judge's opinions have been a thorn in the side for the Commission — confronting the agency's time-honored affinity for settlement and examining the parameters by which the judiciary should limply defer to the discretion of an administrative agency. Growing increasingly frustrated, the Commission appealed the judge's latest rejection to the US Court of Appeals for the Second Circuit, where a panel recently criticized the judge's actions in an unusually harsh and condescending tone and scheduled a hearing on the merits for September.

Commentators have spilled much ink on the high-profile defendants, appealing facts or colorful judicial language of each of the above controversies. Yet, the value of the judge's opinions is found, more basically, in his insistence that administrative agencies respect the courts' charge to protect the "overriding public interest in knowing the truth." Rakoff has held fast to Montesquieu's notion (echoed by Madison) that judicial authority should remain separated from the legislative and executive powers. At the same time, his actions have shown tangible results. Most notably, in the Bank of America case, the judge spirited a more thorough accounting of the bank's transgressions and substantially increased reparations for the bank's victims. More importantly, the judge has effectively highlighted the battleground on which many of the next generation of big policy clashes are likely to be fought.

In civil litigation, it is well established that a dispute can be resolved by contract between the parties and courts remain nearly powerless to shape such a private bargain. In fact, private resolution is highly desirable by saving time and money typically expended in protracted litigation. Settlements also reduce the number of trials and are consistent with the civil justice system's overall goal of ensuring a just, speedy and inexpensive determination of every action. A deferential role for courts in evaluating the consent judgments negotiated by government agencies finds root in the US Constitution, as prosecutorial decisions are an exclusively executive function. By settling a matter, parties look to extinguish the ongoing case or controversy that triggers a court's jurisdiction.

Today, over ninety percent of Commission proceedings are settled and not litigated on the merits. In recent years, the Commission has routinely sought court approval of each settlement. Court approval is not required, but offers access to judicial contempt and injunctive relief powers in the event that a settling party violates an agreement's terms. The overwhelming majority of courts have approved SEC settlements routinely without scrutinizing their factual bases or requiring substantive adjustment. This "rubber stamp" has persisted despite the fact that public agency settlements can be distinguished from the best private settlements because they:

  • (i) regularly impact third parties,
  • (ii) often lack good faith negotiations between two equal parties and
  • (iii) generally derive from less noble motivations.

Today's proposed SEC settlements routinely include language prohibiting a settling party from engaging in similar securities law violations in the future, and from making or sponsoring any public statement denying any of the Commission's allegations. This "non-admission / non-denial" posture typically disfavors the truthful facts of a dispute in favor of a comfortable contrivance that each party can abide.

It is unsurprising that the Commission has turned its enforcement function into a settlement mill. Very crudely, the Commission prefers settlement with many defendants to full-fledged trials with a few. The conservation of Commission resources and the threat of reputational harm stemming from a loss at trial are significant motivators in favor of settlements. Invariably, the Commission's support and bargaining strength are enhanced through aggressive and successful settlement activity. From a defendant's perspective, settlement offers a desirable alternative to the expensive and unwanted publicity of a trial. Settling defendants often seek concessions concerning the violations alleged in the Commission's complaint, the language of the complaint and the collateral and administrative consequences of the settlement. Lost in the zest for settlement, however, is the fact that the structure of most arrangements is hostile to both the Commission's charge to protect the integrity of the nation's markets and a court's duty to defend and ensure the public interest. "Non-admission / non-denial" is particularly distasteful against a regulatory structure that regularly calls upon registrants to abide by full, fair and accurate disclosure.

Confronted with a proposed consent judgment from a federal agency, courts have some restraints in the scope of their inquiry. The law requires deference to the regulatory body having primary responsibility for the matter at hand. Such an approach embraces the notion that courts asked to pass on the judgment of executive agencies possess less information, expertise, and political oversight than the agencies. For example, courts are routinely not privy to:

  • (i) the details of the alleged wrongdoing,
  • (ii) the intricacies of the negotiation between the parties,
  • (iii) the facts of how the settlement or the litigation will affect the parties,
  • (iv) the costs and benefits of proceeding with the case or
  • (v) how the settlement will affect other parties.
Recent commentators (and the Second Circuit) have embraced an extremely deferential posture for the courts and diminished the judicial function to little more than a rubber stamp.

Rakoff has challenged this view, suggesting that the Commission provide the courts with more underlying information in exchange for the grant of its contempt and injunctive powers. No one disputes that proper deference should be afforded the administrative agency charged with carrying out the affairs over which it is expert. At the same time, however, a court must show fidelity to its own judicial needs, and should be reluctant to assert its authority absent a proper articulation of the underlying conduct. The ability to craft the specific terms of any settlement fit squarely within the Commission's bailiwick and courts should grant the agency significant latitude in tailoring arrangements with defendants. When the Commission desires to employ a court as its enforcer, however, it is equally appropriate that the court be afforded a true understanding of the facts requiring judicial authority. To hold otherwise is to turn deference into impotence and to render judicial power dispensable at the whim of a federal bureaucrat. Such a regime simply cannot be supported when one considers that the agency is free to settle with any party without involving the courts.

Some tangible results of Rakoff's crusade are already taking hold. First, the Commission's recent appeal in the Citigroup case will put the issue front and center later this year. Meanwhile, other judges are asking federal agencies to satisfy specific court-directed inquiries like no time in recent memory. More interesting than whether there exists a public interest inquiry within the proper scope of judicial review is the question of just how robust such a review should be and where its boundaries should be drawn. In the coming days and years, the courts, the Commission and individual defendants will be left to define the scope of proper judicial inquiry. Rakoff has done a real service to begin a process of more properly defining these roles that should have started long ago.


Michael Macchiarola is a Distinguished Lecturer at the City University of New York School of Law. Prior to that, he practiced law at Cadwalader, Wickersham & Taft, LLP and was an Adjunct Professor at Seton Hall University School of Law.

Suggested citation: Michael Macchiarola, Demanding Accountability from the Encroaching Administrative State, JURIST - Forum, May 13, 2012, http://jurist.org/forum/2012/05/michael-macchiarola-rakoff-sec.php.



This article was prepared for publication by Caleb Pittman, the head of JURIST's academic commentary service. Please direct any questions or comments to him at academiccommentary@jurist.org

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