The Second Circuit’s long-awaited decision in SEC v. Citigroup Global
Markets, Inc.,1 released on June 4, 2014, held that Judge Jed S. Rakoff of the
Federal District Court for the Southern District of New York abused his
discretion in refusing to approve a proposed consent decree between the
Securities and Exchange Commission and Citigroup.2 The Second Circuit
vacated the decision of the court below3 and remanded, clarifying the
appropriate standard of review to preclude judicial evaluation of the “adequacy”
of a consent decree. The Circuit held that the standard for reviewing a consent
decree is simply whether it is “fair and reasonable,” thereby limiting the District
Court’s substantive review of consent decrees to a significant extent. The
Second Circuit also emphasized the discretionary power of the SEC in
determining how to prosecute and settle enforcement actions, recognizing that
the decision to settle a given case is a pragmatic one based on numerous factors.
The Circuit held that the “exclusive right” to decide the charges to be asserted
against a defendant rests with the SEC, and that the SEC’s determination
regarding whether a consent decree serves the public interest “merits significant
1 Docket Nos. 11–5227–cv (L), 11–5375–cv (con), 11–5242–cv (xap.), 2014 WL 2486793 (2d Cir.
June 4, 2014) (“Citigroup II”).
2 Following Judge Rakoff’s order setting a trial date, in March 2012 a Second Circuit motions
panel stayed the lower court proceedings pending this appeal. SEC v. Citigroup Global
Markets, Inc., 673 F.3d 158, 169 (2d Cir. 2012).
3 SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011) (“Citigroup I”).
June 6, 2014
Richard T. Sharp
Wayne M. Aaron
Ian E. Browning
CLIENT ALERT: Litigation & Arbitration Group June 6, 2014 2
deference.”4 This decision should allay defendants’ concerns that they will be
forced to provide a binding admission before a settlement will be approved in
civil district court proceedings, often a major issue in civil actions brought by
regulators such as the SEC. It should not be viewed, however, as a signal that
the SEC will abandon attempts to obtain such admissions when it deems
appropriate, whether in the civil or administrative context.
When deciding whether to approve consent decrees between the SEC and
private parties, certain courts within the Second Circuit (including the District
Court in this action) have evaluated whether the proposed settlement is “fair,
reasonable and adequate.”5 Where injunctive relief is included in the proposed
consent decree, courts also must conclude that the “public interest would not be
disserved.”6 The Circuit observed that the “adequacy” requirement “appears
borrowed from the review applied to class action settlements” where it makes
“perfect sense” because such settlements may preclude future claims, and that
this is not an issue with SEC consent decrees, where potential plaintiffs may
bring their own actions.7
SEC v. CITIGROUP GLOBAL MARKETS, INC.
The SEC filed a complaint against Citigroup in October 2011 alleging that
Citigroup negligently misrepresented its role and financial interest in a billiondollar
fund known as “Class V Funding III,” alleging that Citigroup influenced
the selection of approximately half of the fund’s assets, contrary to its statement
to investors that the fund’s portfolio would be selected by an independent
investment advisor.8 These securities were largely collateralized by subprime
securities tied to the U.S. housing market.9 The SEC further alleged that
Citigroup selected for inclusion in the fund a significant amount of mortgagebacked
securities in which Citigroup had taken a short position, resulting in a
4 Citigroup II, 2014 WL 2486793, at *9-10.
5 See, e.g., SEC v. Cioffi, 868 F. Supp. 2d 65, 74 (E.D.N.Y. 2012) (emphasis added); SEC v. CR
Intrinsic Investors, LLC, 939 F. Supp. 2d 431, 434 (S.D.N.Y. 2013).
6 eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006).
7 See Citigroup II, 2014 WL 2486793, at *7.
8 Id. at *1.
CLIENT ALERT: Litigation & Arbitration Group June 6, 2014 3
$160 million profit to Citigroup, while fund investors incurred significant
When filing the complaint, the SEC also filed a proposed consent decree with
Citigroup in which Citigroup would agree to: (1) a permanent injunction
prohibiting Citigroup from violating Sections 17(a)(2)-(3) of the Securities Act
of 1933; (2) disgorge $160 million (Citigroup’s alleged profits); (3) pay
prejudgment interest of $30 million; and (4) pay a civil penalty of $95
million.11 Citigroup further would agree not to seek an offset against any
compensatory damages awarded in any related investor action and consent to
make internal changes, spanning three years, to prevent similar acts from
District Court Ruling
In the decision below, Judge Rakoff criticized the proposed consent decree,
comparing it unfavorably with the civil penalty imposed by consent decrees
approved in other SEC cases.13 He commented that the proposed consent
decree would transform the court into “a mere handmaiden to a settlement
privately negotiated on the basis of unknown facts, while the public is deprived
of ever knowing the truth in a matter of obvious public importance.”14 He then
refused to approve the consent decree, consolidated the case with SEC v.
Stoker,15 a related case in which the SEC asserted claims against a Citigroup
employee allegedly involved in the matter, and set a trial date.16
Second Circuit’s Decision
As noted above, following the District Court’s ruling, the parties immediately
filed for a stay pending interlocutory appeal, which was granted by the Second
Circuit.17 Both the SEC and Citigroup advocated for reversal. The Second
Circuit reversed the District Court’s ruling, clarified the applicable standard of
review, and remanded the case to Judge Rakoff for reconsideration of the
13 These cases were: SEC. v. Bank of Am. Corp., No. 09 Civ. 6829 (JSR), 2010 WL 624581
(S.D.N.Y. Feb. 22, 2010); SEC v. Goldman, Sachs & Co., No. 10 Civ. 3229 (BSJ), Docket No. 25
(S.D.N.Y. July 20, 2010).
14 Citigroup I, 827 F. Supp. 2d at 332.
15 Docket No. 11 Civ. 7388 (JSR).
16 Citigroup I, 827 F. Supp. 2d at 335.
17 See supra, n.2.
CLIENT ALERT: Litigation & Arbitration Group June 6, 2014 4
proposed consent decree to “consider whether the public interest would be
disserved by entry of the consent decree.”18
The Circuit “quickly dispense[d]” with the argument that the District Court had
abused its discretion by requiring an admission of liability as a prerequisite to
approving the proposed consent decree, as pro bono counsel appointed to
represent the District Court stated that the Court had not conditioned its
approval on an admission of liability. The Circuit expressly stated that “there is
no basis in the law . . . to require an admission of liability as a condition for
approving a settlement . . . . [That decision] rests squarely with the S.E.C.”19
The Circuit next addressed the scope of deference district courts should afford
proposed consent decrees and noted the strong federal policy favoring their
enforcement and approval. In furtherance of this policy, the Circuit clarified
that the appropriate inquiry is whether proposed consent decrees are “fair and
reasonable” and, in cases where injunctive relief is requested, ensuring that the
public interest would not be disserved.20 Notably, the Circuit explicitly rejected
the concept of “adequacy” from the standard, observing that the concept
appears to be borrowed from the review applied to class action settlements
which “strikes us as particularly inapt in the context of a proposed S.E.C.
consent decree.”21 The Circuit explained that while analyzing class actions for
adequacy is logical because they preclude future civil claims, SEC consent
decrees do not pose this problem.22
Detailing the requirements of the “fair and reasonable” standard, the Circuit
held that a court analyzing proposed SEC consent decrees “should, at a
minimum,” assess: (1) the basic legality of the decree; (2) whether the terms of
the decree, including its enforcement mechanism, are clear; (3) whether the
decree reflects a resolution of the claims asserted; and (4) whether it is “tainted
by improper collusion or corruption of some kind.”23 The “primary focus of the
inquiry . . . should be on ensuring the consent decree is procedurally proper,
using objective measures . . ., taking care not to infringe on the S.E.C.’s
discretionary authority to settle on a particular set of terms.”24
18 Citigroup II, 2014 WL 2486793, at *9 (holding that the court below incorrectly defined the
“public interest” as an overriding interest in the truth). The Circuit also noted that on remand,
“if the district court finds it necessary,” that it may ask the parties to provide additional
information to alleviate any concerns regarding potential collusion between the parties. Id. at
19 Id. at *6.
20 Id. at *7.
CLIENT ALERT: Litigation & Arbitration Group June 6, 2014 5
The Circuit held that the District Court had abused its discretion by requiring
the SEC to establish the “truth” of the allegations against the settling party as a
precondition for approving a consent decree.25 The Circuit noted that while
trials are “primarily about the truth,” settlements like consent decrees are
“primarily about pragmatism” and “provide parties with a means to manage
risk.”26 The Circuit also noted that the SEC is tasked with assessing whether
settling makes sense, and that such an assessment involves numerous factors
including the likelihood of success and the costs and benefits of proceeding to
trial.27 As the Circuit conclusively held, “[i]t is not within the district court’s
purview to demand ‘cold, hard, solid facts, established either by admissions or
by trials’….”28 The Circuit noted that “the district court here, with the benefit
of copious submissions by the parties, likely had a sufficient record before it to
determine if the proposed decree was fair and reasonable.”29
Finally, the Court addressed whether the “public interest would be disserved”
by the consent decree because it included injunctive relief, but proceeded to
hold that “[t]he 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.”30 The Circuit noted that the District Court
“correctly recognized that it was required to consider the public interest,” but
held that its improper definition of the “public interest” as “‘an overriding
interest in knowing the truth’” constituted legal error.31 The Circuit further held
that it was an abuse of discretion “[t]o the extent the district court withheld
approval of the consent decree on the ground that it believed the S.E.C. failed to
bring the proper charges against Citigroup.”32 The Circuit also noted that a
district court may not reject consent decrees because they fail to provide
collateral estoppel assistance to private litigants because “that simply is not the
job of the courts.”33
The Second Circuit’s decision in Citigroup has several important implications
for litigants and subjects of regulatory investigations. First, it reaffirms the
25 Id. at *8.
26 Id. (emphasis added).
28 Id. (quoting Citigroup I, 827 F. Supp. 2d at 335).
30 Id. at *9. For example, the Circuit explained that if injunctive relief in a consent decree were
to bar private litigants from “pursuing their own claims independent of the relief obtained
under the consent decree,” the public interest may be disserved Id.
31 Id. at *10 (quoting Citigroup I, 827 F. Supp. 2d at 331).
CLIENT ALERT: Litigation & Arbitration Group June 6, 2014 6
broad, discretionary powers of the SEC to manage its own cases and determine
whether settlement is an appropriate course of action in a given case. Second,
the clarified standard of judicial review for consent decrees significantly
reduces the ability of district courts to reject such settlements, because the
“adequacy” of the settlement is not a valid consideration. Finally, it should
allay concerns of civil defendants (or entities under civil investigation) that they
will be required to admit liability in order to settle. This is particularly
important in light of the potential collateral estoppel effects such an admission
in a civil matter may have in related civil litigation.34 Although it is now clear
that the SEC is not required to seek admissions to obtain approval of a consent
decree, it still has free reign to seek them (whether in the civil or administrative
context), and has signaled that it will continue to do so when appropriate.
34 When not actually litigated, such admissions may not result in collateral estoppel, but may
be considered evidentiary admissions.
CLIENT ALERT: Litigation & Arbitration Group June 6, 2014 7
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