In late 2011, the Securities and Exchange Commission (SEC) announced a settlement with Citigroup Global Markets in connection with a $1 billion CDO.
Calling the settlement terms unfair, unreasonable, inadequate, and not in the public's interest, United States District Court Judge Jed Rakoff rejected the settlement in an opinion that has generated widespread attention and concern in the legal and business communities.
Does this provocative decision signal a new, more stringent, and more disconcerting standard in settling regulatory enforcement actions?
The role of the court
In most civil actions, a court must enter judgment when parties agree on settlement terms prior to trial. However, settlements in certain cases – frequently those involving shareholders and regulators – require court approval.
For example, settlements in representative shareholder class and derivative actions are conditioned on court approval "only after a hearing and on finding that [they are] fair, reasonable, and adequate" (Fed.R.Civ.P. 23(e), 23.1(c)). Because...