What Is The Big Deal About "Neither Admit Nor Deny" Settlements?

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 public interest.

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.

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