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Strange Bedfellows – SEC v. CitiGroup Litigation

Philip R. Stein


In a sharply worded opinion, the Second Circuit Court of Appeals issued a stay to the district court proceedings in S.E.C. v. Citigroup, in the Southern District of New York.

There, Judge Rakoff had previously refused to approve a proposed $285 million settlement in a case where, simultaneous with the filing of the complaint charging Citigroup with negligent misrepresentation under 15 USC ss. 77q(a)(2) and (3), the S.E.C. and Citigroup jointly presented a proposed consent judgment to the district court for approval.

The district court rejected it, finding it was “pocket change,” and not in the public’s best interest because it included no admission by Citigroup of its liability in the matter.

The unity of the parties is unmistakable and quite striking: “The S.E.C., as plaintiff, and Citigroup, as defendant, each bring interlocutory appeal from that order. The S.E.C. alternatively petitions for a writ of mandamus to set the order aside. Citigroup joins with the S.E.C. in all its arguments.”  What a way to reinforce the common perception of the big banks and government working closely together to keep everyone else in the dark.

Because the litigant parties were so completely unified, the appeals court had to appoint counsel to take the side of Judge Rakoff. Thus, the appeals court acknowledged that it was only issuing a stay, not answering the ultimate question of whether the district court‘s order should in fact be overturned. It’s not everyday that a Circuit Court appoints counsel to defend the position of the district court before it officially overturns the district court!

The appeals court made many points that don’t leave much question as to how it will rule when faced with the ultimate question of whether the alleged wrongdoing by Citigroup must be disclosed at the insistence of Judge Rakoff. The Court of Appeals all but rejected Judge Rakoff’s “failure to serve the public interest” conclusion that the failure to admit liability does not assist the investors in recovering their losses. The appeals court pointed out that this assumes that Citigroup had in fact misled investors, and that the S.E.C. would have succeeded at trial.

But the appeals court was just getting warmed up, stating unequivocally that there was not proper deference to the S.E.C.’s policy decision, and that a federal court’s role in that situation is “minimal.” “It is not. . . the proper function of federal courts to dictate policy to administrative agencies.” The appeals court also alluded to Citigroup’s might.

But perhaps whatJudgeRakoffwas saying by refusing to approve the settlement in the first place is that he felt that the S.E.C, particularly in the aftermath of the financial meltdown, should fulfill its mandate to act in the public’s best interest.

Perhaps he also expected that the S.E.C would take the hint after his ruling and require the disclosures in the settlement, rather than cozying up to Citigroup and jointly appealing the decision. It appears that the Court of Appeals is impressed by the after the fact unanimity in taking an appeal from Judge Rakoff’s decision.  The Court of Appeals’ reasoning suggests that a judge should be little more than a “rubber stamp” to the settlement.

Even if that were the case, Judge Rakoff seems to be saying he was not given enough information regarding the basis for and the merits of the settlement to do that.

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