We have posted previously about Judge Jed S. Rakoff’s refusal to approve the SEC’s proposed $285 million settlement with Citigroup in connection with certain mortgage backed securities. Among other things, Judge Rakoff’s November, 2011 order was critical of the SEC’s long standing policy of allowing settlements without an admission of liability and the fact that the settlement imposed no obligation on the SEC to return any of the settlement funds to defrauded investors. As we posted in March, a three-judge panel of the Second Circuit stayed the proceedings before Judge Rakoff pending appeal. On May 14, 2012, both Citi and the SEC filed their appeal briefs.
Both parties argued that Judge Rakoff had committed clear error and exceed his discretion. The SEC’s brief, in particular, argued that Judge Rakoff’s decision established a dangerous precedent that will make it more difficult for the SEC to enter into settlements:
The district court’s rule interferes with the Commission’s exercise of its law enforcement powers. The district court did not defer to the Commission’s decision to resolve the matter through a consent judgment, which the Commission reached after years of investigation and lengthy negotiations with Citigroup. This decision reflected the Commission’s judgment that settlement best served the public interest given the balance of various factors, such as litigation risk, resource allocation, and the relief contained in the judgment, which represented a substantial portion of what the Commission could have obtained after a successful trial. If left standing, the rule established by the district court will make it more difficult for the Commission to enter into settlements, forcing the Commission, with its limited budget, to pursue fewer cases. Such a rule intrudes upon the Commission’s authority to allocate its resources, and ultimately harms investors.
Citi’s brief, among other things, also pointed to the practical after-effects of Judge Rakoff’s decision, arguing that
…private parties can ill afford the risks of agreeing to a consent judgment predicated on an admission of wrongdoing given the potentially devastating collateral consequences posed by private litigation premised on such admissions. Specifically in this case, Citigroup’s management and Board of Directors appropriately considered these potential adverse collateral consequences in determining to consent to the entry of the proposed Consent Judgment. CGMI and its affiliates are defending numerous class action lawsuits and related litigations asserting claims arising out of the subprime and credit crisis, which include allegations specifically related to CGMI’s CDO-related business practices.10 These private civil litigations rest on allegations that CGMI misled investors by making false statements concerning its subprime exposure and concealing its involvement in the CDO market. In electing to settle this matter pursuant to the SEC’s longstanding “no admit, no deny” policy, Citigroup’s management and Board appropriately prioritized its current shareholders’ interests in minimizing the adverse collateral consequences associated with being adjudicated at fault in this matter, including the enhanced risk of an adverse outcome in these numerous pending private civil litigations.
Judge Rakoff, represented by attorney John Wing of Lankler Siffert & Whohl LLP, has until August 13 to submit a brief. Mr. Wing was appointed to represent Judge Rakoff, as Citi and the SEC share the same interest of moving the settlement forward. According to Law360 (subscription), “[t]he appeals court will wait until September to hear arguments in the case.”