After three years and several highly publicized rulings, Citigroup and the S.E.C. received judicial approval to settle a 2011 lawsuit without Citigroup admitting or denying wrongdoing. United States S.E.C. v. Citigroup, No. 11-cv-7387, 2014 U.S. Dist. LEXIS 107205 (S.D.N.Y. Aug. 5, 2014). But Judge Jed Rakoff’s harsh criticism of the consent judgment, coupled with the S.E.C. policy shift it apparently prompted, may make such settlements less common.

In a 2011 complaint, the S.E.C. had alleged that Citigroup negligently structured and marketed a billion-dollar fund. United States S.E.C. v. Citigroup, 827 F. Supp. 2d 328 (S.D.N.Y.2011). Citigroup purportedly advertised that outside advisors selected the fund’s assets, yet the bank used “significant influence” to incorporate mortgage-backed securities into the fund. According to the S.E.C., Citigroup was shorting those securities and ultimately reaped $160 million during the financial crisis, while fund investors lost $700 million. Almost immediately after the case began, the parties submitted a consent judgment in which Citigroup would disgorge its $160-million profit, pay a $95 million penalty, and agree to an injunction against future violations. Citigroup would neither admit liability nor stipulate to any facts.

Judge Rakoff rejected the settlement, criticizing the “S.E.C.’s long-standing policy—hallowed by history, but not by reason —of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations.” Because the judgment stipulated no facts, Judge Rakoff concluded “[a]n application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” and noted the penalty was “pocket change” to Citigroup. The Second Circuit reversed on appeal, ruling courts may only scrutinize “the basic legality” of a consent judgment, including whether it is clear, not “tainted by improper collusion,” and resolves all claims. United States S.E.C. v. Citigroup, 752 F.3d 285 (2d Cir. 2014). Requiring parties to “establish the ‘truth’ of the allegations against a settling party,” as Judge Rakoff had, is an abuse of discretion. As the Second Circuit concluded, “the job of determining whether the proposed S.E.C. consent decree best serves the public interest . . . rests squarely with the S.E.C., and its decision merits significant deference.”

Judge Rakoff recently approved the settlement on remand, noting the Court of Appeals had “fixed the menu, leaving this Court with nothing but sour grapes.” But the Second Circuit’s ruling reemphasizes the Commission’s wide latitude to craft neither-admit-nor-deny settlements. If the parties reach an agreement, judges may only examine procedural defects, rather than an agreement’s substantive fairness. Even so, the S.E.C. has since signaled a policy shift under Chairwoman Mary Jo White, due at least in part to Judge Rakoff’s criticism. See James B. Stewart, S.E.C. Has a Message for Firms Not Used to Admitting Guilt, N.Y. TIMES, Jun. 21, 2013, at B1. While neither-admit-nor-deny settlements will remain the norm, the S.E.C. plans to demand admissions of wrongdoing in egregious cases, claiming “[d]efendants are going to have to own up to their conduct on the public record.”

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