Judiciary v. Executive Branches of Government: A Matter of Authority A federal appeals court said on Thursday that the SEC was likely to succeed in its attempt to overturn Judge Jed Rakoff’s rejection of its fraud settlement with Citigroup over the sale of mortgage-related investments before the financial crisis. In presenting its mostly procedural decision, the higher court firmly rebuked Federal District Court Judge Rakoff for seemingly overstepping the authority of the Judiciary Branch after he rejected a settlement between the SEC, an agency of the Executive Branch, and Citigroup, a private party.  He had opposed the settlement, saying it included no admission of guilt. Monumental (in C-I's opinion) Decision. The decision is a significant result for the SEC, which has said that its ability to settle enforcement cases would all but disappear if defendants were forced to admit guilt.  In an unsigned but unanimous decision dated Thursday, a 3-judge panel of the Court of Appeals for the Second Circuit in New York agreed, adding:

“Requiring such an admission would in most cases undermine any chance for compromise.”

The appeals court ordered ... a stay of Judge Rakoff’s scheduling of a trial on the fraud charges and said the merits of the judge’s rejection of the proposed $285 million settlement would be argued before the appeals court.  The court said a lawyer would be appointed to argue for upholding Judge Rakoff’s order. Appeals Court's Expectations re: Overturning Rakoff's Rejection. Noting that it had not heard an argument in Judge Rakoff’s favor, other than the written opinion itself, the court nevertheless said, "We are satisfied that the S.E.C. and Citigroup have made a strong showing of likelihood of success in setting aside the district court’s rejection of their settlement." The court noted that Judge Rakoff’s opinion prejudged the assertion that Citigroup misled investors, assumed that the SEC would win a trial, and discounted the possibility that Citigroup would refuse to settle the case if it had to admit liability. Judge Rakoff’s decision "does not appear to have given deference to the SEC’s judgment on wholly discretionary matters of policy," the appeals court said.  "It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies." The unanimous, unsigned opinion came from Judges John M. Walker Jr., Pierre N. Leval, and Rosemary S. Pooler. The SEC said it was pleased with the decision of the appeals court.  [No, duh!] "As we have said consistently, we agree to settlements when the terms reflect what we reasonably believe we could obtain if we prevailed at trial, without the risk of delay and uncertainty that comes with litigation," Robert Khuzami, director of the SEC’s division of enforcement, said in a statement.  "Equally important, this settlement approach preserves resources that we can use to stop other frauds and protect other victims." Click for further details:  [Dealbook, 3/15/12] and  [US Court of Appeals Ruling].