When Judge Rakoff rejected the Securities and Exchange Commission’s settlement with Citigroup on November 28^th, 2011, he consolidated the case with that of former Citigroup executive Brian Stoker for purposes of discovery and trial. Because the SEC and Citigroup had appealed the case, the Stoker case proceeded separately to trial on the Citigroup securities fraud. The SEC argued that Stoker’s fraudulent conduct was intentional but that the jury need only find him negligent to hold him liable.

 Stoker’s counsel responded in a “Where’s Waldo?”  defense that his client had been scapegoated, that Stoker followed ‘best practices,’ and that many more people other than Stoker knew far more about the investments being sold.  The jury found Stoker not liable but sent a statement with the verdict that, “This verdict should not deter the SEC from investigating the financial industry and current regulations and modify existing regulations as necessary.”

 On the one hand, this verdict might support the SEC’s argument that given the uncertainty as well as the cost of pursuing trial verdicts, the $295 million settlement was wrongly rejected. Judge Rakoff, on the other hand, who presided at Stoker’s trial, argues that Citigroup should come back to court since,  “Armed with the record of that case, the district court could now assess whether the proposed injunctive relief is reasonable, adequate, and fair; but at the time of the order that is the subject of this appeal, the district court had no basis to do so.”

Appointed pro bono to represent the district court’s position, John Wing presented the case that given that the appeals court may only review for abuse of discretion and the district court’s position is that in the absence of a sufficient evidentiary basis as to how/why settlement was reached, there was no abuse of discretion.

The defendant’s refusal to acknowledge any liability was not the reason for the rejection of the consent judgment--it was the lack of an evidentiary basis upon which to assess whether “the decree was appropriate to the complaint.” An ironic note in the brief refers to the SEC’s change in its admission of liability policy since the November 28th decision, no longer permitting “neither admit nor deny” settlements with defendants  who have pleaded guilty to charges or been convicted in parallel criminal proceedings.

 Throughout the brief the consent judgment is referred to as “problematic” to the point where approving it would have reduced the judge’s independent judgment to that of a “potted plant,” with a level of deference to the SEC making a mockery of the judiciary’s constitutional grant of separation of powers.

The district court’s appellate brief argues that concern for the public interest is not meaningfully severable from the required consideration of the consent judgment’s fairness, reasonableness and adequacy and that part of this is measured by a settlement’s ability to further the goals of the statute that the judgment is designed to enforce. A fundamental aim of an enforcement action, brought by the SEC for violation of the antifraud provision of the securities laws is deterrence; a primary purpose of disgorgement orders is to deprive violators of their ill-gotten gains and a further aim, as amended by the Sarbanes-Oxley Act, is restitution to injured investors. Therefore, when the parties failed to provide the district court with any information as to the amount of Citigroup’s gross gain, the court was unable to calculate disgorgement or penalties. Where the SEC acknowledges that investors lost upwards of $700 million, a penalty of $95 million raised basic (unanswered) questions as to whether it adequately addressed either future deterrence or the degree of harm to investors.  

The brief refers to many cases in which consent judgments were approved without the defendant’s admitting liability such as in the Bank of America case when the SEC remedied the insufficiency of the evidence by submitting a 35-page statement of facts to the court. Another example given is the $535 million imposed in similar circumstances in Goldman and how the Citigroup case failed to present any explanation for the much smaller settlement.   

In an amicus brief filed by former SEC Commission Chairman Harvey Pitt, urging the appeals court to affirm Judge Rakoff’s decision, he addresses the claim by appellants Citigroup and the SEC that the “district court’s effort to obtain answers to its questions will impede enforcement prerogatives by creating a new bright–line test before negotiated consent decrees can be judicially approved--that defendants must admit allegations in SEC complaints.”

His position is that the district court articulated no such rule but merely “raised questions with which SEC Enforcement Staff is familiar from its interchanges with SEC Commissioners, and as to which they should have readily-available answers.” 

The district court’s appellate brief suggests the parties return to the bargaining table, or ask the court to consider the evidentiary record from the Stoker trial as a means of supporting a renewed request for approval of the consent judgment. 

By Laura Salisbury, APPR Legal Editor