Ultimately, the 2nd Circuit's opinion hands a victory not only to Wall Street, but to its federal regulators, which now gain some additional leeway when negotiating settlement deals with Wall Street.
Rakoff of the U.S. District Court in Manhattan had rejected what he saw as a sweetheart deal for Citigroup, which the SEC accused of duping investors into buying a complex mortgage bond deal during the waning days of the housing boom. The bank agreed to pay $285 million to settle the civil fraud case.
The judge called the fine "pocket change" for the bank. He also took aim at the SEC's decision to allow Citigroup to settle the case without admitting wrongdoing, saying the parties deprived the public "of ever knowing the truth in a matter of obvious public importance."
His effort was not in vain. Last year, the SEC reversed its longstanding policy of automatically allowing companies to neither "admit nor deny wrongdoing," signaling that it would force admissions in particularly egregious cases.
Rakoff's standoff with the SEC, while instilling fear in the finance industry and its regulators, also inspired other judges to follow suit in a handful of cases. And to critics of Wall Street, the judge developed something of a celebrity status, becoming a symbol of the effort to crackdown on Wall Street misdeeds.
The 2nd Circuit's decision, however, will effectively rein in any judicial uproar. The three-judge panel provided guidelines for exercising discretion over federal enforcement cases, potentially tying a judge's hands.
"It is an abuse of discretion to require, as the district court did here, that the SEC establish the 'truth' of the allegations against a settling party as a condition for approving the consent decrees," the three-judge panel wrote in its opinion. "Trials are primarily about the truth. Consent decrees are primarily about pragmatism."
Rakoff declined to comment on the ruling, as did Citigroup.
The appellate court outlined a checklist for judges to follow when weighing such case. The "proper standard for reviewing" a case, the court ruled, requires a judge to "determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the public interest would not be disserved." A judge, the appellate court added, should take "care not to infringe on the SEC's discretionary authority to settle on a particular set of terms."
The appellate ruling will have an immediate impact on another big case - the more than $600 million settlement of an insider trading lawsuit the SEC filed against Steven A. Cohen's SAC Capital Advisors. Judge Victor Marrero, also of the U.S. District Court in Manhattan, approved the settlement in April 2013, but made his decision contingent on the outcome of the appeal in the Citigroup case.
In his opinion, Marrero said that he had serious concerns with the "neither admit nor deny" language contained in the settlement with SAC, but would approve the deal pending further guidance from the 2nd Circuit.
Now that the 2nd Circuit has rejected Rakoff's rationale for refusing to accept the SEC's settlement with Citigroup, it would appear Marrero would be unlikely to revisit the SAC settlement despite his reservations.