Volume 10, Issue 4 - May 2012

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The Expanding Role of Judges in Settlement and Beyond

Linda Chatman Thomsen, Seth Rosenbloom, David Polk & Wardwell LLP

1931 PLI/Corp 415

Traditionally, there have been defined limitations on the judges’ role in reviewing settlements. Judges review settlements in special civil contexts where the parties may be vulnerable or nonparties may be at risk. Consent judgments may also lead judges to engage in review. In the criminal context, judges have to approve plea bargains, which are basically settlements. However, several recent judicial decisions have challenged the usual limitations on judges’ roles in reviewing settlements. These cases are high profile and may have led the judges to assume a greater role when dealing with settlement. Nonetheless, these are exceptions to the normal judicial practice.

Most civil settlements do not trigger any judicial review. Often the parties voluntarily end the action, and a judge is unlikely to even see the settlement. This limitation occurs because settlements are private contracts. Settlements save the parties and the courts resources, but this also means that judges may not receive information that would be necessary to meaningfully assess a settlement because the parties have yet to gather or fully analyze it. Certain situations do require a judge to play a greater role. Class action law suits raise concerns about the rights of absent parties. Settlements that bind class members require hearings to determine that the settlement is fair. Shareholder derivative suits and bankruptcy proceedings also give the judge an expanded role in reviewing the settlement.

Consent judgments are judicial orders that preserve a civil settlement and allow the courts to retain jurisdiction to enforce the agreement. Judges typically are limited when evaluating proposed consent judgments because they are given minimal information, and the entry of a consent judgment has become routine. The judges’ ability to review is particularly limited when a federal agency seeks a consent judgment. However, the requirement of a judges’ signature on a consent judgment means that there is a possibility of greater scrutiny.

In the criminal context, judges have specific responsibilities for reviewing plea bargains. At the federal level, a judge can reject a plea bargain that she does not believe furthers the interest of justice. There is increased judicial scrutiny because the judge ensures that the defendant understands her rights and is giving a voluntary plea. Parties often present facts and information as well. If the parties are particularly vulnerable or the agreement has a far-reaching effect, the judicial review will likely be more intense.

While this highlights the traditional judicial role in civil settlements and plea bargains, several recent decisions challenge this traditional framework. Judge Alvin K. Hellerstein of the Southern District of New York rejected a proposed settlement for the workers who responded to the September 11 terrorist attacks. His reasoning was that it apportioned too much money to attorney’s fees without adequately providing the workers sufficient compensation. He also acknowledged that judges usually have no power in settlements because they are private, but he believed that because the case involved 9/11, it warranted the review. There was no appellate review of his action because the parties reached a different settlement that was approved. Yet this was an extremely high profile case that had dominated Judge Hellerstein’s docket for nearly a decade and had immense media coverage, so the judge did feel that there was a responsibility to ensure a fair agreement. In addition, the case involved a massive number of potentially vulnerable claimants that created an atmosphere similar to that of a class action.          

Another case where the judge did not approve the proposed settlement involved the SEC complaint against the Bank of America. The SEC alleged that the bank had misled shareholders in a proxy statement concerning the acquisition of Merrill Lynch. The complaint specified that the proxy had stated Merrill would not pay certain bonuses while Bank of America had agreed that they could. The SEC also filed a proposed consent judgment against Bank of America that same day. Judge Rakoff scheduled oral argument and requested written submissions from the parties. Then, a month after the filing, he rejected the settlement in an opinion that was described as voicing the anger and frustration of ordinary Americans. In the opinion, he recognized the need for deference to settlements, but he believed that further review was appropriate here because it was a consent judgment. The opinion highly criticized both parties, and Judge Rakoff believed that the $33 million penalty proposed by the SEC was trivial and would cause shareholders to have to pay for their own victimization. The case signaled a possible expansion in the judge’s role in reviewing consent judgments and also suggested a shift away from the deference afforded to administrative agencies. It also served as a sign of the anger against the alleged wrongdoing of Wall Street and the enforcement façade of federal regulators.

The response of Bank of America and the SEC was to file a second proposed consent judgment. During his evaluation of this agreement, Judge Rakoff benefitted from extensive discovery, multiple written submissions, and information from an investigation conducted by the New York Attorney General. One of the changes from the initial proposal was actually pursuant to a suggestion from the Judge himself. Judge Rakoff reluctantly approved the proposal, even though he felt it was “half-baked justice at best.” The reason for the approval was that Judge Rakoff recognized that he had to give the SEC substantial deference and that his role as the judge was to ensure compliance with the law and not to impose his own preferences. Since the settlement however, other judges have also taken on substantial roles in cases involving the government and financial institutions.

A consent judgment between the SEC and Citigroup was not approved immediately by Judge Ellen S. Huvelle. She too was concerned that the penalty would be pushed onto the shareholders and questioned whether the agreement was fair and reasonable. She asked the parties for additional briefing and scheduled a second hearing date. Eventually, she announced that she would approve the proposed settlement if there were certain modifications. While she approved it, she was reluctant to do so because she did not feel that the penalties provided a deterrent effect. However, she said that she had to defer to the SEC and did not have control over what they decided to charge.

A day after Judge Huvelle’s initial rejection, another judge criticized a deferred prosecution agreement between the Justice Department and the Barclays. Judge Emmet G. Sullivan called it a “sweetheart deal.” He was concerned that there was not adequate penalization and he questioned the lack of prosecutions. Stating that it was not his duty to oversee the Justice Department, Judge Sullivan did reluctantly approve the settlement after the parties provided additional support. It is also likely that he was constrained by the narrow scope of judicial review for deferred prosecutions. The New York Times stated that the rulings of Rakoff, Huvelle, and Sullivan were part of a pattern that departed from the usual deference to the settlements of federal agencies. The Times also noted that the overall impact was modest because of the limited power of the courts over settlements.

The SEC filed a complaint and a proposed consent judgment against Citigroup in the Southern District of New York in October of 2011. The complaint alleged that Citigroup misled investors regarding a collateralized debt obligation connected to the U.S. housing market, while the proposed consent judgment included a penalty of $285 million. The case was randomly assigned to Judge Rakoff. Judge Rakoff continued to have misgivings about the SEC’s settlements and felt that they were unworthy of an agency like the SEC. In another case brought by the SEC against Vitesse Semiconductor Corporation, he had criticized the practice of the SEC that allowed defendants to resolve claims without admitting or denying the allegations. However, in that case, Judge Rakoff approved the proposed consent judgment because there were parallel criminal cases occurring, and Vitesse had incurred serious financial penalties. These led him to find that the company had effectively admitted the allegations.

In the Citigroup complaint, Judge Rakoff scheduled a hearing and requested that the parties answer nine questions regarding the settlement. During the hearing, Judge Rakoff challenged the parties regarding SEC policies, the basis of the agreement, and the appropriate standard of review to apply. Judge Rakoff rejected the proposed judgment in another scathing opinion. He reproached the SEC for stating that he could not consider the public interest, and he rejected an argument that such a determination belonged to the SEC, because giving them that power would violate separation of powers and the independence of the judiciary. He believed that the proposed consent judgment was not fair or reasonable, and it did not provide the court with enough evidence for a meaningful assessment. Judge Rakoff criticized SEC settlements where defendants did not admit or deny wrongdoing because it denied the court assurance that the injunctive relief had a basis. While he ultimately focused on the lack of an adequate evidentiary basis, he also expressed concern about whether the penalty was adequate. The opinion received massive mediation attention and garnered the front page of the New York Times. In response, the SEC stated that the decision ignored decades of precedence, and they have filed an appeal.

The traditional framework has also been challenged in regards to plea bargains. Judges usually do not reject plea bargains, but two recent high-profile cases have recent attention for such rejections.

In the first, Lea Fastow, a former Enron employee and with to the company’s CFO, was scheduled to enter a guilty plea on January 7, 2004.  Under the agreement, she would have pleaded guilty to a felony charge related to the filing of tax returns that omitted earnings and hid Enron’s debt. The plea would have required the judge to impose a sentence of five months in jail and five months in confinement. However, Judge David Hittner of the Southern District of Texas rejected this agreement without giving Ms. Fastow the opportunity to enter a plea. This was unusual procedurally because the court normally takes the guilty plea, determines whether to accept it, and then allows the defendant to withdraw the plea if the judge rejected the bargain. When the parties noted this, Judge Hittner stated he would accept a guilty plea but was probably not going to accept the plea bargain. Ms. Fastow still pleaded guilty. At a hearing, Judge Hittner again stated that he would not accept the plea. Ms. Fastow then withdrew her plea. A new agreement was reached between the parties so that Ms. Fastow would plead guilty to a misdemeanor that had a maximum sentence of twelve months. Judge Hittner sentenced her to the maximum sentence. Despite the prosecutor’s considerable ability to control sentencing through charging, the maximum sentence allowed the judge to limit any attempt to reach a particularly lenient sentence.

In the second case, Guidant LLC pleaded guilty to two misdemeanor charges that stemmed from misleading statements made to the FDA regarding the safety and effectiveness of defibrillators. The plea would have resulted in a $253 million criminal fine and a $42 million criminal forfeiture, and would have done away with a presentence investigation report. Judge Donovan W. Frank rejected the agreement. He stated in his written decision that the settlement was not in the best interest of justice and did not serve the public interest. He felt that there was a lack of probation, and Judge Frank listed suggestions of probations that could be performed in connection with court-ordered probation. He also rejected the contention that a presentence report was unnecessary because it helped him to consider the appropriateness of the probation and its consequences. Judge Frank received a presentence report after he rejected the plea agreement. He gave Guidant the opportunity to withdraw its plea, although he signaled that he did not intend to substantially depart from the terms of the rejected plea. Guidant declined to withdraw, and Judge Frank imposed the sentence from the plea agreement, but also sentenced Guidant to a three-year period of probation. He also said that the information he received after his initial rejection was helpful because he was satisfied that the agreement did not come at the cost of the shareholders.

These cases are not typical. Here, the judges assumed unexpectedly large roles, but judges do not usually have this responsibility. Substantial judicial review requires extra and often unnecessary work by the parties and the court. When parties are sophisticated, judges usually defer to their settlements. Certain civil cases and criminal cases may lead the judges to more closely scrutinize settlements, but their role is still limited. However, in cases with notoriety or vulnerable parties, the judges may more strictly review settlements. The opinions in these cases often give the judges an opportunity to address policy preferences and issues, and those who are involved in settling cases with these characteristics should take care in crafting and explaining their agreements.

* Summary by Brittany Doggett, Moritz class of 2013.

Posted in: Volume 10, Issue 4

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