Rakoff Approves SEC-Citigroup Settlement, Saying Second Circuit Left Him With ‘Sour Grapes’

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By Rob Tricchinelli  

Aug. 5 — U.S. District Judge Jed Rakoff signed off Aug. 5 on a $285 million settlement between the SEC and Citigroup Inc., two months after the Second Circuit overturned his rejection of the deal.

Rakoff nixed the settlement in November 2011, saying the facts presented did not support the Securities and Exchange Commission's decision to not require Citigroup to admit wrongdoing in its sales of failing mortgage-backed securities that cost investors hundreds of millions.

In a short opinion accompanying the settlement approval, Rakoff said the U.S. Court of Appeals for the Second Circuit's ruling in June means similar future settlements would be “subject to no meaningful oversight whatsoever” by judges.

The appeals court “has now fixed the menu, leaving this court with nothing but sour grapes,” he wrote.


The SEC sued Citigroup in October 2011 in the U.S. District Court for the Southern District of New York, and the parties subsequently sought to settle the allegations without the bank admitting or denying wrongdoing.

In his November 2011 rejection of the settlement, Rakoff said the SEC's no admit no deny policy was “hallowed by history, but not by reason” and that it “deprived the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.”

Two months after she took over the SEC's helm, Chairman Mary Jo White revised the agency's traditional policy of allowing settling defendants to neither admit nor deny its allegations, saying the agency will insist on an admission in egregious and other circumstances.

“Even after giving substantial deference to the views of the administrative agency,” Rakoff opined that the settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest.”

Appeal and Response

The Second Circuit overturned Rakoff's decision in June, holding that a trial judge's standard for reviewing such settlements is whether they are “fair and reasonable.”

The appeals court said the fair and reasonable inquiry involved the basic legality of the settlement, whether its terms are clear, whether it resolves the claims in the complaint, and whether it is “tainted” by collusion or corruption.

The Second Circuit also held that the SEC is the primary arbiter of whether a settlement is in the public interest and a trial court should take care “not to infringe on the SEC's discretionary authority to settle on a particular set of terms.”

In his opinion accompanying the Aug. 5 order, Rakoff said the settlement met the “very modest standard imposed by the Court of Appeals.”

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

To see Rakoff's opinion accompanying the settlement order, go to http://www.bloomberglaw.com/public/document/US_Securities_and_Exchange_Commission_v_Citigroup_Global_Markets_.

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