This morning, the Second Circuit’s Motion Panel granted the SEC’s motion to stay the District Court proceedings in the litigation against Citigroup Global Markets, Inc. while the appellate court considers whether it should set aside Judge Rakoff’s decision refusing to approve the settlement between the parties. Specifically, the Court of Appeals found that the Commission and Citigroup "made a strong showing of likelihood of success" in either their appeals or petition for mandamus. The Court also stated that the SEC and Citigroup have shown "serious, perhaps irreparable, harm sufficient to justify grant of a stay." According to the Court, a stay would not substantially injure any other persons. The Court also found that the SEC’s "assessment of the importance of its settlement to the public interest" was entitled due deference. Because it granted the stay of the lower court proceedings, the Court also ruled that there was it was not necessary to expedite the appellate proceedings. Finally, the Court directed the Clerk of the Court "to appoint counsel, who will advocate for upholding the district court’s order."

The by-now familiar background in the case is as follows:

• on October 19, 2011, the SEC and Citigroup Global Markets agreed to a settlement under the usual neither-admit-nor-deny standard in which the defendant agreed to pay $285 million;

• when asked to approve the settlement, Judge Rakoff asked the parties to answer a series of questions;

• the SEC responded on November 7, 2011 by answering some of the Judge’s questions and arguing that the Court was not entitled to consider some of the questions;

• on November 28, 2011, Judge Rakoff rejected the proposed settlement with Citigroup as "neither fair, nor reasonable, nor adequate, nor in the public interest," criticizing the long-standing policy of accepting settlements without an admission of liability as "hallowed by history, but not by reason," and ruling that the Commission’s request that the Court assert its authority without knowing the facts was "inherently dangerous";

• on December 15, 2011, the SEC appealed the matter to the Second Circuit (and Citigroup also filed a cross-appeal);

• on December 28, 2011, the Second Circuit ruled that an emergency motion by the SEC would be submitted to that Court’s motions panel on January 17, 2012," and that "[i]n the interim, proceedings in the District Court are stayed until a ruling by the motions panel;" and

• on December 29, 2011, the SEC filed a Petition for a Writ of Mandamus with the Second Circuit, arguing that Judge Rakoff has overstepped his bounds and requesting that the Second Circuit order him "to enter [the] proposed consent judgment" between Citigroup and the Commission.

The Second Circuit’s Motion Panel noted that, although it is "unclear whether an interlocutory appeal lies from an order refusing to approve a proposed consent judgment," the appellate court clearly has jurisdiction due to the petition for a writ of mandamus. In fact, the SEC argued at one point that the reason it filed a petition for a writ of mandamus was "in the event that this Court disagrees about appealability under Section 1292(a)(1), in which case this Court may exercise jurisdiction under 28 U.S.C. 1651."

The Motions Panel identified the four standards it would consider it determining whether a stay was appropriate: (1) the likelihood of success on the merits; (2) whether the moving parties will suffer irreparable harm absent a stay; (3) whether a stay would injure other parties; and (4) where the public interest lies.

In considering the likelihood of success, the Motions Panel considered Judge Rakoff’s conclusion that the SEC’s settlement with Citigroup failed to serve the public interest:

In that reasoning, we perceive several problems. First, it prejudges the fact that Citigroup had in fact misled investors, and assumes that the SEC would succeed at trial in proving Citigroup’s liability. The court appeared to assume that the SEC had a readily available option to obtain a judgment that established Citigroup’s liability, either by trial or settlement, but chose for no good reason to settle for less. The district court’s logic appears to overlook the possibilities (i) that Citigroup might well not consent to settle on a basis that requires it to admit liability, (ii) that the SEC might fail to win a judgment at trial, and (iii) that Citigroup perhaps did not mislead investors.

The Motions Panel also concluded that Judge Rakoff did "appear to have given deference to the SEC’s judgment on wholly discretionary matters of policy." The Court stated that it is not the function of federal courts to dictate policy to executive administrative agencies," adding that "the scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal."

The Motions Panel doubted Judge Rakoff’s conclusion that he could not evaluate the fairness of the settlement without the underlying facts being were established either by a trial or by binding admission of liability: "This is tantamount to ruling that in such circumstances, a court will not approve a settlement that represents a compromise. It is commonplace for settlements to include no binding admission of liability. A settlement is by definition a compromise."

On the issue of irreparable harm to the parties, the Motions Panel concluded that it existed. While case law establishes that the inability to conclude a settlement is usually not irreparable harm (because parties can return to the bargaining table), the Panel stated that in this case, "the court’s posture – requiring a binding admission of liability as a condition of approval of the settlement – virtually precludes the possibility of settlement." In short, the Panel determined, the parties cannot cure the problem caused by Judge Rakoff’s decision.

The Motions Panel found that there was no injury to others caused by a stay because it merely maintained the status quo. The Panel also concluded that it was in the public’s interest to allow the stay, granting deference to the Commission’s view.

The appeals filed by the SEC and Citigroup (as well as the petition for writ of mandamus) raise an interesting procedural issue. Both parties to the litigation want the settlement approved. No one has argued against those issues. The Motions Panel crafted a way to resolve that issue:

We recognize that, because both parties to the litigation are united in seeking the stay and opposing the district court’s order, this panel has not had the benefit of adversarial briefing. In order to ensure that the panel which determines the merits receives briefing on both sides, counsel will be appointed to argue in support of the district court’s position.

It is important to note that the Motion Panel’s ruling is a procedural first step and the finding that the litigants have shown the likelihood of success on the merits is not binding on the Panel that will hear the appeal:

The merits panel is, of course, free to resolve all issues without preclusive effect from this ruling. In addition to the fact that our ruling is made without benefit of briefing in support of the district court’s position, our ruling, to the extent it addresses the merits, finds only that the movant has shown a likelihood of success and does not address the ultimate question to be resolved by the merits panel – whether the district court’s order should in fact be overturned.

The Clerk of the Court will also issue a scheduling order to allow the parties (including the as-yet-to-be-appointed advocate for the District Court’s ruling) to fully brief the matter.