Last year, Judge Jed S. Rakoff blocked a settlement between the SEC and
Citigroup. His reason? Citigroup was paying a fine but not admitting to
any wrongdoing. Although it has been common practice for settlements with
federal regulatory agencies to contain this kind of language, judges are
ceasing to be rubber stamps for these types of agreements. The
New York Times reports that two other judges have issued similar rulings.
So what is the major issue here? Quite simply, when nobody admits to wrongdoing,
it is impossible to know whether the punishment fits the . . . whatever
a non-admission is. At law, the standard is whether the settlement is
fair, adequate, and in the public interest. The judges who oppose these
types of settlements argue that if nobody admits to wrongdoing, it is
impossible to know whether the settlement is fair, adequate, and in the
For example, let's say that I break my neighbor's window. I offer
to pay him $100, but refuse to admit to wrongdoing. If the cost of replacing
the window is close to $100, then it may be a fair offer of settlement.
However, what if I break my neighbor's window by firing a .44 magnum
handgun into the window? Not only could the bullet do damage to the interior
of the house and its inhabitants, but the character of the window's
breaking has changed. Instead of an errant baseball or golf ball being
the cause of the harm, it was my deliberate and highly dangerous means
of breaking the window. In that scenario, agreeing to pay a mere $100
is likely insufficient and would not settle the case.
In the context of these regulatory settlements, lenders are hoping to exit
with a token fine and no admission of wrongdoing. However, it is becoming
increasingly obvious that, at least in some of these cases, the wrongdoing
is more like shooting somone's window than it is like accidentally
breaking it by slicing a chip shot. Without some admission of guilt, it
is difficult for judges to evaluate whether the settlement is truly fair.
Keep in mind that these settlements are extinguishing lawsuits -- the
federal regulator has already alleged some serious wrongdoing.
If judges are to remain arbiters of justice, then they need to continue
to reject these kinds of settlements. In the meantime, maybe we should
rexexamine the fact that this has become a customary practice -- no admission
of wrongdoing should be the exception, not the norm.