Share

Settlement

Friday, June 6, 2014

Second Circuit Rejects Judge Rakoff’s Rejection of Citigroup Settlement with SEC

Court of Appeals for the Second Circuit – In United States Securities and Exchange Commission v. Citigroup Global Markets, Nos. 11-5227-cv; 11-5375-cv; 11-5242-cv, the U.S. Court of Appeals for the Second Circuit found that the district court abused its discretion by rejecting a proposed Consent Judgment between Citigroup Global Markets (Citi) and the Securities and Exchange Commission (SEC). The court vacated Judge Rakoff’s decision and remanded for further proceedings.

 

In October 2011, the SEC filed a complaint against Citi claiming that it negligently misrepresented its role and economic interest in structuring and marketing a certain fund. Essentially, the SEC alleged that Citi took a short position, but advised investors that the fund’s investment portfolio had been selected by an independent advisor. As a result of the misrepresentation, Citi realized profits of approximately $160 million, while investors suffered millions of dollars in losses. Soon after the complaint was filed, the SEC and Citi presented the Southern District of New York with a proposed Consent Judgment: (1) permanently enjoining Citi from further violating certain provisions of the Securities Act of 1933; (2) disgorging $160 million, which the SEC calculated were the profits gained by the negligent conduct alleged in the complaint; (3) prejudgment interest in the sum of $30 million; (4) a civil penalty of $95 million; and (5) Citi’s agreement not to set off any sums paid against subsequent related investor actions, and an agreement by Citi to make certain internal changes to prevent similar acts from occurring in the future. As part of the Consent Judgment, Citi was not required to admit guilt or wrongdoing.

 

Judge Rakoff presided over the motion to approve the Consent Judgment. He presented both sides with a number of questions relating to why the court should accept the Consent Judgment. After both sides responded to the court’s questions and the court conducted a hearing, in November 2011, Judge Rakoff rejected the proposed Consent Judgment. In doing so, Judge Rakoff noted that although deference is due to the SEC, a court may not be used “as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.” Opinion p. 8. The district court further noted that “[a]n application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous.” Opinion, p. 10. Judge Rakoff found it problematic that Citi was not required to admit to any wrongdoing, or even to allocute to any of the facts that gave rise to the complaint and, subsequently, the proposed Consent Judgment.

 

Applying an abuse of discretion standard, the Second Circuit explained that an interlocutory appeal of a proposed settlement may be proper when a party can show that: (1) the district court, by refusing to approve the settlement, effectively denied injunctive relief, and (2) without an interlocutory appeal, the party will suffer irreparable harm. Opinion p. 16 (citing Grant v. Local 638, 373 F.3d 104, 108 (2d Cir. 2004). The Second Circuit explained that the proposed Consent Judgment contained two types of injunctive relief – one enjoining Citi from further statutory violations, and the other requiring Citi to take steps to prevent future occurrences of fraud. The irreparable harm was the district court’s order that both parties try the case in the absence of a Consent Judgment.

 

The Second Circuit then explained that Judge Rakoff’s insistence on some admission of liability was improper because “there is no basis in the law for the district court to require an admission of liability as a condition for approving a settlement between the parties.” Opinion p. 17. If the SEC did not require such an admission, the court held, the district court could not do so.

 

A district court is not merely a rubber stamp, of course, the Second Circuit noted. Rather, a court presented with a proposed Consent Judgment should determine whether the proposed settlement is “fair and reasonable, with the additional requirement that the ‘public interest would not be disserved’” if the proposed consent judgment includes injunctive relief. Opinion p. 19 (citing eBay, Inc. v. MercExchange, 547 U.S. 388, 391 (2006). Because a consent judgment between a government agency and a private party is significantly different than a class action settlement that bars future private rights of action, the Second Circuit left out the “adequacy” requirement usually required when evaluating the fairness of a proposed settlement. The factors to consider the reasonableness and fairness of a proposed consent judgment are: (1) the basic legality of the proposed decree; (2) whether the terms are clear; (3) whether the proposed consent decree actually resolves the claims in the complaint; and (4) whether the proposed consent decree is tainted by collusion or other corruption of some kind. The primary focus, however, according to the Second Circuit, is whether the proposed consent decree is procedurally proper.

 

The Second Circuit also declined to require that the SEC establish the truth of the allegations set forth against the settling party. Noting that “trials are primarily about the truth. Consent decrees are primarily about pragmatism,” Opinion p. 21, the Second Circuit noted that a compromise involves many considerations, and a district court should not derail a settlement in order to demand a factual recitation by the settling party. A district court still should rely on the evidence in the record to ensure that the proposed settlement or consent judgment is fair and reasonable, but a separate factual allocution is not required.

 

According to the Second Circuit, deference to the SEC means that the inquiry about whether the public is being disserved by the proposed settlement is framed by the SEC’s determination in the first instance that the settlement is beneficial and within the public interest. Merely disagreeing with the terms of the proposed settlement is not a sufficient basis for denying a proposed consent decree by the district court, the Second Circuit explained.

 

Judge Lohier concurred, but felt that if the four factors enumerated by the court above were satisfied, “the perceived modesty of monetary penalties proposed in a consent decree is not a reason to reject the decree.” Concurrence p. 1. Additionally, Judge Lohier explained that because it does not appear that additional facts need to be developed in order to find that the Consent Judgment is fair and reasonable, remand was not necessary.




Rosenblatt Law PC is located in Hackensack, NJ and represents clients throughout Northern New Jersey and the New York metro area, including the five boroughs of NYC, Rockland and Westchester counties, as well as Bergen, Essex, Hudson, Morris, Passaic, Sussex and Union counties.



© 2018 Rosenblatt Law PC | Attorney Advertising
21 Court Plaza South, Suite 305, Hackensack, NJ 07601
| Phone: 551-444-8100

Commerical/Civil Litigation | Criminal Defense | Appellate Law | LEGAL MALPRACTICE | | Attorney Profile

Law Firm Website Design by
Zola Creative