[by Larry Goldfarb]

The long standing suit initiated by the SEC suit against Bank of America Merril Lynch (BAML) appears to be approaching a major inflection point.  On Friday, an attorney for Citigroup asked a three-judge appeals panel of the U.S. appeals court to let a $285 million settlement with the Securities and Exchange Commission be approved.

The suit appeared to be settled in 2009 when BAML agreed to pay $285 million, in return for not having to admit wrong doing.   But, U.S. District Judge Jed Rakoff, in 2011, refused to approve the agreement, which would resolve claims that New York-based Citigroup misled investors in a $1 billion financial product linked to risky mortgages.  Rakoff has been an outspoken critic of the SEC for settling fraud cases without being required to admit that they had done anything wrong.  If Rakoff's decision is upheld, the case will be probably go to trial.  Otherwise, the case will be over with Citi making the settlement payment.

The suit and the adjudication before the court of appeals represents a seminal moment for these type of settlements.  A ruling in Judge Rakoff's favor could embolden the federal judiciary to refuse to approve S.E.C. settlements in which defendants do not admit wrongdoing.  A number of agencies including the Federal Communications Commission and the Justice Department's antitrust division also routinely use the "neither admit nor deny wrongdoing" boilerplate language in settling enforcement cases with corporate defendants.  If that type of language is denied in future cases, according to the government, it would overburden federal agencies that are already constrained. If the S.E.C. were required to extract an admission of wrongdoing from a corporation, there would most likely be fewer settlements and more trials, which are costly.  In court papers, Judge Rakoff's lawyers dismissed such a claim as "needlessly alarmist."

In the hearing before the appeals court panel, Judge Lohier reflected on the concern that a judge should be able to approve these type of settlements.  What if, he asked, the agency had settled with Citigroup for only $100,000? Would a judge then have the authority to reject that deal?  Michael A. Conley, the S.E.C's deputy general counsel, commented, “"It's very unlikely that the S.E.C. would ever settle with Citigroup for that amount.”

For more information, please read [Dealbook, 2/8/13], [Bloomberg, 2/8/13]