It also noted that Rakoff's ruling was flawed because there was no guarantee Citigroup would agree to settle if it had to admit to liability, that the SEC would win its case if forced to go to court, or even that Citigroup had misled investors in the first place. Reaching a settlement that does not require admitted culpability does not negate the entire agreement, it determined.
"A settlement by definition is a compromise," the court wrote in its ruling.
The SEC said the appeals ruling ensures the SEC will not have to tie up or otherwise risk resources in court that could be spent pursuing other matters.
"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," said Robert Khuzami, the SEC's head of enforcement. "Equally important, this settlement approach preserves resources that we can use to stop other frauds and protect other victims.”
With public anger still bubbling over Wall Street's role in the financial crisis and whether regulators have brought a sufficient number of bad actors to justice, lawmakers responded to the ruling by looking into the SEC's settlement practices. The House Financial Services Committee announced in January it would a hearing on the matter, which has yet to be scheduled. .
After the ruling, the SEC tweaked its settlement practices slightly. It now prohibits parties that have already admitted to or been convicted of criminal wrongdoing from refusing to admit to those charges when brought civilly by the SEC. The agency said the changes were brought about after review of the policies, not in direct response to Rakoff's decision.
This post updated at 3:07 pm.