Is Three A Crowd? The Role of the Courts in SEC Settlements

samantha a. dreilinger, Kim & Chang/Northwestern University School of Law

Abstract

In August 2009 Judge Jed Rakoff made the unprecedented decision to reject a settlement proposed by the SEC and Bank of America. Although Judge Rakoff eventually approved the agreement, his decision appears to have sparked a trend of judicial scrutiny for SEC settlements. In contrast with the long tradition of judicial deference, some courts are now requiring evidence that the proposed provisions are "fair, reasonable and in the public interest." In order to promote justice, judges are also questioning light penalties and why executives are not being held accountable for the alleged misconduct of a corporate defendant. Critics of this new level of judicial scrutiny claim that the courts are infringing on the SEC's prosecutorial discretion and may dissuade companies from negotiating settlements with the SEC. In response to these claims, this paper explores the ramifications of a judge's role in the SEC settlement process. It also proposes a set of procedures that can preserve settlements as an efficient and effective method of resolving SEC enforcement actions while helping to ensure that the far-reaching effects of SEC settlements are in the public interest.