IS TOO BIG TO FAIL TOO BIG TO CONFESS?: SCRUTINIZING THE SEC's "NO-ADMIT" CONSENT JUDGMENT PROPOSALS

IntroductionDuring childhood, many disputes end by way of forced apology.1 But in the securities world, malfeasants rarely acknowledge responsibility for their actions.2 In fact, under the Securities Exchange Commission's (SEC) standard settlement terms, malefactors may expressly refuse to confess to wrongdoing.3 Since November 2011, in SEC v. Citigroup Global Markets Inc. (Citigroup I ), when Judge Jed S. Rakoff of the United States District Court for the Southern District of New York struck down a $285 million settlement between the SEC and a subsidiary of Citigroup Inc. because the company explicitly refused to admit to misconduct, the SEC has come under increasingly intense pressure to force defendants to own up like grown-ups.4The recent controversy originates in the SEC's endemic use of "noadmit" consent judgment proposals.5 A "no-admit" consent judgment enforces a settlement containing a "no-admit" clause, under which the defendant explicitly disclaims any admissions of wrongdoing.6 Defendants value "no-admit" clauses because they help to eliminate collateral estoppel effects and mitigate potential economic and reputational repercussions.7 The SEC, in turn, willingly employs "no-admit" clauses to extract other concessions and to avoid the costs and uncertainty of trial.8Critics, however, assert that "no-admit" consent judgments do not adequately promote the public interest because the judgments do not deter future misbehavior or aid the public in learning the truth about a defendant's prior misbehavior.9 Moreover, "no-admit" consent judgments diminish a defendant's anticipated adverse consequences and thereby encourage unlawful conduct.10 Additionally, such "no-admit" consent judgments fail to provide the public with clear, definitive information about the defendant's misconduct.11Accordingly, some courts have followed Judge Rakoff's lead in the Citigroup I litigation and have closely examined recent SEC consent judgment proposals.12 As a result, ample attention has recently focused on the court's role in approving or rejecting "no-admit" SEC consent judgment proposals.13 Attitudes tend to diverge according to the way consent judgments are understood generally.14 Models of consent judgments range from those that treat the parties' agreement with substantial deference to those that demand exacting scrutiny.15The SEC, however, is in a much better position than a court to identify and implement appropriate consent judgment terms.16 Courts are far more limited than the SEC in determining whether a particular SEC consent judgment proposal adequately balances the competing considerations that factor into an SEC litigation decision, and courts cannot craft consent judgments on their own.17 Unlike a court, which can reach decisions only upon the evidence presented before it, the SEC enjoys a broad perspective-including an awareness of budgetary constraints and historical litigation success-that allows it to effectively weigh the benefits and drawbacks of its litigation options.18 Moreover, courts can only consider the consent judgment proposals that the SEC places before it.19 Accordingly, the SEC is the party in the best position to evaluate and adjust its settlements.20Recognizing the courts' concerns regarding "no-admit" clauses, however, the SEC should take steps to ensure that their use is limited to circumstances in which they serve the public interest.21 First, the SEC should limit the use of such proposals by requiring outright admissions in large, novel, and high-profile cases or, alternatively, by simply refusing to settle on a "no-admit" basis.22 Second, when certain elements of a case prove more important than others, the SEC should limit the scope of "no-admit" clauses to narrower sets of allegations and narrower sets of collateral estoppel effects.23 Third, the SEC should provide a court with an extremely thorough explanation for any consent judgment for which it seeks approval. …