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Thursday, May 31, 2012

Lawmakers, Business Groups and Federal Judges Weigh in on Pending SEC v. Citigroup Appeal

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 The U.S. Court of Appeals has set the case between the Securities and Exchange Commission and Citigroup Global Markets, Inc. for oral argument September 2012. SEC and Citigroup want the settlement approved and Judge Rakoff’s controversial decision reversed. The Court has appointed counsel to argue in favor of rejecting the $285 million settlement.

Reverberations continue throughout the legal, business and judicial communities.

The topic was addressed May 10 by a legal panel during the fifth annual Alan B. Levenson Symposium in Washington. Federal judges, current and retired, agreed that judges should not have to rubber-stamp poorly presented agency decisions. Consensus was that retaining judicial independence while according due deference to the executive branch was a delicate task. Having served in both capacities as retired federal judge and former SEC enforcement director, Stanley Sporkin insightfully suggested that “the real battle” in the Citigroup case is “between two branches of the government.”

Last winter in the furor following Judge Rakoff’s rejection of the settlement, Committee Ranking Member Barney Frank (D-Mass) requested a hearing which was held on May 17 before the House Financial Services Committee. Several democratic lawmakers from California, New York and Texas echoed Judge Rakoff’s concern that allowing these “neither admit nor deny” settlements encouraged mega-businesses to easily afford to continue to violate the securities laws.

Some Republican lawmakers, on the other hand, agreed with Robert Khuzami, SEC Enforcement Director’s rationale that settlements were the most expedient, efficient use of the SEC’s resources rather than protracted, expensive court trials with no guarantees of a better outcome for investors. Rep. Scott Garret’s (R-N-J) opinion was that allowing congress to interfere with the SEC’s “discretion” was “completely irresponsible.” Responding to Mary Schapiro’s request to Congress to increase the SEC’s penalty for recidivists, Rep. Barney Frank (D-Mass) expressed hope that the committee would authorize that as a means of increasing the SEC’s enforcement arsenal.

Finally, there has been no shortage of amici curiae briefs filed this month in preparation for the September court date. May 22, the Securities Industry and Financial Markets Association (SIFMA), the U.S. Chamber of Commerce, and the Pharmaceutical Research and Manufacturers of America (PhRMA) filed amici curiae briefs in the U.S. Court of Appeals for the Second Circuit in support of SEC and Citigroup’s position.

In a joint filing, the Chamber and PhRMA criticized Judge Rakoff’s “sweeping decision” and its adverse effect on businesses trying to determine how to respond to government enforcement actions.

Support for Judge Rakoff’s position can be found in an amicus brief filed by “Alternative Banking (“OWSs-AB”),” a group within the New York-based Occupy Wall Street movement. That brief argued that deference to the SEC “does not obviate a district court’s power to demand more facts.” OWSs-AB’s brief argued that full transparency is the public’s right and “the SEC is an imperfect proponent of the public interest, and its assertions that it represents that interest must be viewed skeptically.”

John C. Coffee, Jr., a Columbia law school professor and friend of Judge Rakoff was interviewed in a November 2011 article in Businessweek about the case. He emphasized that Judge Rakoff, who spent much of his career as a securities litigator defending corporations and investment banks, should not be confused with a member of the Occupy Wall Street movement. Coffee described the SEC as an overworked, underfunded agency and his solution was that the SEC ought not to enter into “weak, cosmetic settlements. The answer is to bring fewer cases and litigate them more extensively.”

By Laura Salisbury
Legal Editor
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