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Tuesday, April 10, 2012

Second Circuit Stays SEC, Citigroup Case; Critiques Judge Rakoff’s Rationale

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 The U.S. Court of Appeals for the Second Circuit March 15 granted the Securities and Exchange Commission’s and Citigroup’s request for a stay of lower court proceedings which had resulted in a rejection of their proposed consent judgment - a $285 million settlement.

Judge Rakoff’s incendiary Nov. 11 decision had specifically found that the settlement was not in the public interest and ordered the case to be set for a prompt trial.

The U.S. Court of Appeals dismantled Judge Rakoff’s legal rationale and chastised his lack of deference to the SEC’s judgment on “wholly discretionary matters of policy.” The Court found the essential legal requirements for granting a stay pending appeal had been met. The Court said it was granting the stay because it agreed with both Citigroup and the SEC that they were likely to prevail in their argument that the district court should have approved their settlement. The Court faulted the district court for prejudging the case and essentially assuming that the “SEC had a readily available option to obtain a judgment that established Citigroup’s liability, either by trial or by settlement, but chose for no good reason to settle for less.”

The Court panel said Judge Rakoff had “misinterpreted” certain rulings in holding it was against the public interest to approve a settlement without an admission of liability, stating those rulings “stand for the proposition that when a court orders injunctive relief, it should insure that the injunction does not cause harm to the public interest.”

Echoing Robert Khuzami, director of the SEC’s Division of Enforcement, expediency rationale as defense for the policy, the Court questioned the district court’s view that public interest is disserved by a settlement with no admission of liability, as discouraging compromises. The Court did however deny the SEC and Citigroup’s request to expedite the appeal, setting the case for oral argument September 2012 and appointing counsel to argue in opposition to the SEC and Citigroup’s position i.e. in favor of rejection of the settlement.

Judge Rakoff expressed his frustration with what he saw as the regulatory agency’s collusion with the financial industry and failure to protect misinformed investors . The Second Circuit rejected the path of judicial activism and stressed that the “scope of a court’s authority to second guess an agency’s discretionary and policy-based decision is at best minimal.”

Laura Tieger-Salisbury
Legal Editor
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