Earlier this year, Judge Jed S. Rakoff, of the United States District Court for the Southern District of New York, questioned the legitimacy of the SEC’s practice of allowing a defendant to settle charges without requiring factual admissions of wrongdoing. (See April 2011 Spotlight). On November 28, 2011, Judge Rakoff revisited the issue and rejected a negotiated settlement of the SEC’s charges against Citigroup Global Markets Inc. (“Citigroup”) on that very basis. SEC v. Citigroup Global Markets Inc., No. 11-CV-7387 (JSR) (S.D.N.Y. Nov. 28, 2011). The SEC’s complaint alleged that Citigroup created an investment fund and marketed the fund as being carefully selected by an independent investment advisor without disclosing that the fund advisor had actually taken short positions in the very assets the advisor selected. According to the SEC, Citigroup realized $160 million in profit and caused $700 million in investor losses due to its conduct. At the time of filing the complaint, the SEC submitted its negotiated settlement with Citigroup for the court’s approval. The proposed settlement contemplated imposing penalties, requiring Citigroup to disgorge its profits, and enjoining Citigroup from future violations of certain anti-fraud provisions of the securities laws. Consistent with long standing SEC practice, the SEC permitted Citibank to enter the settlement on a “neither admit nor deny” basis – that is, Citigroup did not admit the factual allegations underlying the charges but was prohibited from publicly denying the allegations except under limited circumstances. The court rejected the settlement on the grounds that it could not determine if the settlement was fair, reasonable or in the public interest. The court stated that “this is because [the SEC] does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified….” According to the court, “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, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.” The court also noted that accepting a SEC settlement without admissions of the alleged misconduct deprives the investors who lost millions of dollars from benefiting from collateral estoppel that would aid in their recovery of losses from Citigroup.