This article was reprinted with permission from FCPA Professor
If you have not noticed by now, I admire Judge Jed Rakoff (S.D.N.Y.).
Although outside the Foreign Corrupt Practices Act context, FCPA Professor has covered from day one (see here and here) Judge Rakoff’s concerns about SEC settlement policy as expressed in SEC v. Citigroup. As highlighted in this post, the Second Circuit recently rebuked Judge Rakoff for his refusal to sign off on the settlement and concluded that the SEC does not need to establish “the truth” of the allegations against a settling party as a condition for approving consent decrees because, in the words of the Court, “trials are primarily about truth” whereas “consent decrees are primarily about pragmatism.”
On remand and obligated to assess the SEC v. Citigroup settlement through the narrow prism the Second Circuit adopted, Judge Rakoff had little choice but to approve of the settlement. However, in doing so in his opinion yesterday, Judge Rakoff offered a few final zingers as he wrote:
“Nonetheless, this Court fears that, as a result of the Court of Appeal’s decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever. But it would be a dereliction of duty for this Court to seek to evade the dictates of the Court of Appeals. That Court has now fixed the menu, leaving this Court with nothing but sour grapes.”
In the prior post highlighting the Second Circuit’s decision, I noted that the most troubling aspect of the decision is the statement that if the “S.E.C. does not wish to engage with the courts, it is free to eschew the involvement of the courts and employ its own arsenal of remedies instead.” As highlighted in my article “A Foreign Corrupt Practices Act Narrative,” in the FCPA context this is largely the path the SEC has chosen. As noted, in 2013 50% of SEC corporate FCPA enforcement actions were not subjected to one ounce of judicial scrutiny either because the actions were resolved via a non-prosecution agreement or administrative cease and desist orders.
On this issue, Judge Rakoff states in a footnote as follows.
“[T]he Court of Appeals invites the SEC to avoid even the extremely modest review it leaves to the district court by proceeding on a solely administrative basis. (“Finally, we note that to the extent that the S.E.C. does not wish to engage with the courts, it is free to eschew the involvement of the courts and employ its own arsenal of remedies instead.” ). One might wonder: from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”
As to this last point, see also this recent Wall Street Journal opinion piece by Russell Ryan ((King & Spalding and previously an Assistant Director of the SEC Enforcement Division).
“[A] surge in administrative [SEC] prosecutions should alarm anyone who values jury trials, due process and the constitutional separation of powers. The SEC often prefers to avoid judicial oversight and exploit the convenience of punishing alleged lawbreakers by administrative means, but doing so is unconstitutional. And if courts allow the SEC to get away with it, other executive-branch agencies are sure to follow. [...] On its website, the SEC accurately describes itself as “first and foremost” a law-enforcement agency. As such, the agency should play no role in deciding guilt and meting out punishment against the people it prosecutes. Those roles should be reserved for juries and life-tenured judges appointed under Article III of the Constitution. Today’s model of penal SEC law enforcement is categorically unsuited for rushed and truncated administrative hearings in which the agency and its own employees serve as prosecutor, judge and punisher. Such administrative prosecution has no place in a constitutional system based on checks and balances, separation of powers and due process.”
I also tipped my hat to Judge Rakoff in this November 2013 post for his speech “Why Have No High Level Executives Been Prosecuted in Connection with the Financial Crisis?” As highlighted in the post, Judge Rakoff hit on many of the same general issues (outside the FCPA context) I discussed in my 2010 Senate FCPA testimony - namely the general lack of individual enforcement actions in connection with most corporate FCPA enforcement actions and how this dynamic (far from the “but nobody was charged” claim) could best be explained by the quality and legitimacy of the corporate enforcement action in the first place given the prevalent use of non-prosecution and deferred prosecution agreements to resolve corporate FCPA enforcement actions. As highlighted in the post, in answering his own question, Judge Rakoff offered that “one possibility … is that no fraud was committed. This possibility should not be discounted.”
Read more articles on the FCPA by Mike Koehler at FCPA Professor.
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