Lessons from SEC v. Citigroup: The Optimal Scope for Judicial Review of Agency Consent Decrees

Abstract

On November 28, 2011, Judge Jed S. Rakoff of the United States District Court in Manhattan declined to approve a consent judgment between the Securities and Exchange Commission (SEC) and Citigroup. Because Citigroup had not admitted or denied the allegations in the consent decree, Judge Rakoff concluded that he was unable to make an informed judgment about the merits of the settlement. Judge Rakoff’s decision has met with serious criticism from legal observers and rekindled discussion about the scope of judicial review of agency consent decrees, which have become a valuable agency enforcement tool. This paper attempts to articulate a clear standard of review focused on agency disability caused by a misalignment of interest or inadequate information. The concrete and deferential standard described in this paper would maintain an important gate-keeping function for the court without unduly interfering with agency policy. And a restricted inquiry, focused on conflicts of interest and adequate consideration, is appropriate given the limited institutional competence of the judiciary. The judiciary is not well situated to evaluate the terms of a settlement, which is the product of a complex balancing of agency priorities and is informed by the agency’s overall strategy and policy objectives. It is difficult to see what advantages a judge with a heavy caseload can add to a deal brokered by an agency staff charged solely with promoting the public interest in a particular area. By contrast, judges can be alert to conflicts of interest, as they are in other areas of the law. When evaluating an agency’s structure and information, the reviewing judge is not at an informational disadvantage relative to the parties. As a result, the court can determine whether the agency is properly accounting for social costs and benefits, and can ensure that the agency is not ignoring an important third party interest. Absent any indication of conflict or structural impairment, and given a reasonable justification for the settlement, the judge need not scrutinize the merits of the settlement and incur the costs of judicial review.