Second Circuit Vacates Rejection of Citigroup Settlement

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By Yin Wilczek  

June 4 — In a long-awaited decision, the U.S. Court of Appeals for the Second Circuit ruled that a lower court wrongly rejected a $285 million settlement proposed in 2011 by the Securities and Exchange Commission and Citigroup Global Markets Inc.

The deal would have resolved the SEC's allegations that Citigroup failed to disclose its role in the selection of assets for the portfolio of a $1 billion collateralized debt obligation that the bank structured and marketed in 2007.

In a majority opinion June 4, Judge Rosemary Pooler wrote that Judge Jed Rakoff abused his discretion by demanding “cold, hard, solid facts, established either by admissions or by trials.”

The majority vacated Rakoff's November 2011 decision throwing out the deal and remanded. In a concurring opinion, Judge Raymond Lohier Jr. said that on the facts before him, he would have directed the district court to enter the consent decree.

The ruling comes as no surprise, given that the appellate court previously stayed Rakoff's decision, writing in a scathing March 2012 opinion that the SEC and Citigroup made a “strong showing” that they would succeed in their appeals.

Proper Standard of Review

In its June 4 opinion, the Second Circuit majority added new clarity to the proper standard under which district courts should review a proposed consent judgment involving an enforcement agency. Among other findings, the Second Circuit wrote that there is “no basis in the law” for a district court to require an admission of liability as a condition for approving a settlement between the parties. “The decision to require an admission of liability before entering into a consent decree rests squarely with the S.E.C.,” it wrote.

A district court, in reviewing a proposed consent decree, must determine whether the deal is “fair and reasonable,” the Second Circuit said. In the event that the consent decree includes injunctive relief, the court further must ensure that “public interest would not be disserved,” it said. “Absent a substantial basis in the record for concluding that the proposed consent decree does not meet these requirements, the district court is required to enter the order.”

“We omit `adequacy' from the standard,” the Second Circuit continued. “Scrutinizing a proposed consent decree for `adequacy' appears borrowed from the review applied to class action settlements, and strikes us as particularly inapt in the context of a proposed S.E.C. consent decree.”

Future Impact

Looking ahead, attorneys told Bloomberg BNA that the court's ruling may have considerable impact on future SEC settlements.

“To the extent the SEC's policy of seeking admissions as part of settlements of `egregious' cases was prompted by judicial scrutiny of settlements, the SEC may be more willing to settle cases without admissions when insisting on admissions would otherwise derail settlements,” said Jeffrey Robertson, special counsel in Schulte, Roth & Zabel LLP's Washington office.

“Similarly, to the extent judicial scrutiny of settlements has driven the SEC to insist on fraud (rather than lesser) charges to impose larger penalties or to name individuals rather than just corporations, there is little risk that courts will reject settlements as a result of” the Second Circuit's June 4 ruling, Robertson added.

More generally, the decision will encourage settlements, said Seth Taube, head of securities litigation at Baker Botts LLP, New York, and a former enforcement chief at the SEC's New York Regional Office. “It means that what you negotiate is what will stick,” Taube told Bloomberg BNA.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Susan Jenkins at

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