Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

On Monday, May 14, 2012, both the SEC and the Citigroup Global Markets, Inc. filed their appellate briefs (available here and here) in the three consolidated appeals regarding Judge Jed Rakoff's November 28, 2011 Opinion and Order rejecting the SEC's proposed settlement with Citigroup. Both entities argued that Judge Rakoff committed error in his Opinion and Order, arguing, among other things, that it was contrary to well-established law to reject a consent settlement with a federal agency because it was not supported by admitted or judicially established facts. Both parties also argued that the settlement between them was fair, reasonable and adequate. A Brief in support of the district court’s position will be filed in August 2012.

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On March 27, 2012, the SEC announced that it has sued John Cinderey, a former executive vice president at United Commercial Bank for aiding and abetting securities law violations relating to falsifying books and records and misleading the bank's auditors. The Commission settled with Mr. Cinderey, who agreed to be permanently enjoined from violating provisions of the federal securities laws. The settlement reflected the credit given to Mr. Cinderey "for his substantial assistance in the investigation," along with his agreement to cooperate to assist in an ongoing related enforcement action.

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On Tuesday, March 13, 2012, the SEC announced that it had filed claims against the CEO, CFO and Chief Accounting Officer of Thornburg Mortgage Inc., which used to be one of the nation’s largest mortgage companies, alleging that the three executives hid "the company’s deteriorating financial condition at the onset of the financial crisis" in the company's Annual Report. According to the Commission, "[t]he plan backfired and the company lost 90 percent of its value in two weeks," and ultimately filed for bankruptcy. The case is the latest brought by the SEC relating to the market crisis.

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On Thursday, January 12, 2012, Business Roundtable ("BRT"), the association of chief executive officers of leading U.S. companies, requested leave to file an Amicus Brief in the SEC v. Citigroup Global Markets, Inc. appeal, requesting that the Second Circuit reject the "potentially dangerous, approach to reviewing settlement agreements" in Judge Jed Rakoff's November 28, 2011 decision in the lower court.

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The participants in the Citigroup litigation did not take much of a break during the holidays. As discussed here, on December 27, 2011, Judge Rakoff denied the SEC's request to stay the litigation. As it turns out, the Commission did not even wait for that order – it appears that the SEC's Motion for an Emergency Stay was filed with the Second Circuit before Judge Rakoff denied the similar motion in the District Court. That resulted in the Second Circuit's Order for a temporary stay (also discussed here). On December 29, 2011, Judge Rakoff issued a Supplemental Order, stating that the SEC made a "materially misleading" statement to the Court of Appeals and accused the Commission of misleading him during the process in the District Court. On December 29, 2011, the SEC filed a petition for a Writ of Mandamus and on December 30, 2011, the SEC filed a Supplemental Brief with the Second Circuit, responding to Judge Rakoff's statements by asserting that it [the Commission] was acting "in good faith."

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Today, the Federal Securities Litigation Blog continues its with its larger-than-usual blog entry examining the Top 10 securities litigation stories that were the most intriguing in 2011. As mentioned yesterday, like any sort of Top 10 list, not everyone will agree. Other bloggers will have their own lists with different stories. But on a personal basis, these stories that fascinated me – like a good book, I look forward to the next "chapter" in these stories in 2012.

Here's a quick headline look at the Top 5:

5. The SEC's Inspector General Reports on the Conduct of the Commission Staff.

4. Insider Trading at Galleon Management: Record-Setting Results.

3. The New Whistleblower Rules: Do I Tell Management Before I Tell The SEC?

2. The Lindsey Manufacturing Saga: The Verdict DOJ was "Fiercely Committed" to Obtaining is Vacated.

1. The Citigroup Case: Judge Rakoff's Decision and the Potential Impact on How SEC Cases Proceed.

These five stories are discussed in greater detail after the jump.

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On Wednesday, December 28, 2011, the Second Circuit Court of Appeals stayed the SEC's case against Citigroup Global Markets, Inc. (which is before Judge Rakoff in New York). The appellate court received an emergency motion for a stay after Judge Rakoff denied the request made at the District Court level. That emergency motion is to be submitted to the Second Circuit's motions panel on January 17, 2012. The appellate court ruled that "[i]n the interim, proceedings in the District Court are stayed until a ruling by the motions panel."

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On Friday, December 16, 2011, the SEC filed a Motion in front of Judge Jed Rakoff, asking him to stay to proceedings which the Commission had brought against Citigroup Global Markets, Inc. while the SEC's appeal is pending before the Second Circuit. On December 20, 2011, Citigroup filed a memorandum joining in the SEC's Motion. Unless a stay is granted, the parties will be forced to litigate the matter before Judge Rakoff as part of a consolidated case with the SEC's action against Brian Stoker. As discussed below, the motion to stay presented the SEC with another opportunity to argue why Judge Rakoff was wrong to reject the proposed settlement.

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On Friday, December 16, 2011, the SEC announced that it had entered into non-prosecution agreements with the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") and filed charges against six of their former executives for securities fraud, alleging that "they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans."

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On Thursday, December 15, 2011, the SEC appealed the Opinion and Order issued on November 28, 2011 by Judge Jed Rakoff rejecting the SEC's proposed settlement with Citigroup Global Markets for $285 million (previously discussed here). In a statement, the Director of the Division of Enforcement, Robert Khuzami said that Judge Rakoff "committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits."

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According to media reports (here and here, for example), SEC Chairman Mary Schapiro, in a letter dated November 28, 2011 to Senators Jack Reed and Larry Crapo, has requested a series of statutory changes which would allow the Commission to impose stricter financial penalties for certain securities law violations, as well as greater penalties for recidivists.

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Following yesterday's sharply worded Opinion from Judge Rakoff rejecting the $285 million settlement with Citigroup Global Markets (discussed here), Robert Khuzami, the SEC Director of the Division of Enforcement, issued a statement (available here) claiming that Court "ignore[d] decades of established practice throughout federal agencies and decisions of the federal courts." Mr. Khuzami stated that the SEC respected the opinion, but it would "continue to review the court's ruling and take those steps that best serve the interests of investors."

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In a scathing Opinion and Order issued on Monday, November 28, 2011, Judge Jed Rakoff rejected the SEC proposed settlement with Citigroup Global Markets for $285 million, suggesting the SEC was hoping for "a quick headline" and finding "that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest." Instead, the Judge consolidated the Citigroup case with a related matter, SEC v. Stoker , No. 11-civ-7388 (S.D.N.Y. Filed Oct. 19, 2011), and set a trial date of July 16, 2012. The decision could have a significant impact on how the SEC will approach and settle cases and what defendants who want to settle will be forced to consider.

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A Thursday, November 24, 2011 article from Bob Van Voris on Bloomerg.com states that Citigroup Global Markets, Inc. may have to pay more than the proposed $285 million settlement with the SEC to satisfy Judge Jed Rakoff that the accord is fair. The article hints that Judge Rakoff may be displeased with the settlement because Citigroup is not admitting or denying liability and quotes several attorneys as saying that Citigroup may have to pay more to avoid such an omission.

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On Monday, November 7, 2011, the SEC filed its Brief in response to questions posed by the Court regarding the proposed settlement in SEC v. Citigroup, No. 11-cv-7387 (S.D.N.Y.). In answering the Court's questions, the Commission emphasized that "[t]he proposed consent judgment embodying this settlement is fair, adequate, and reasonable, and should be entered by this Court." The brief submitted by the Commission provided a broader-than-normal look at the Commission's approach to settling cases (although the SEC did argue that the Court was not entitled to consider some of the issues it had raised). Judge Jed Rakoff has scheduled a hearing for Wednesday, November 9, 2011 to consider the proposed settlement.

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On Thursday, October 27, 2011, New York federal Judge Jed Rakoff issued an Order in the SEC's case against Citigroup Global Markets, Inc. (previously discussed here), scheduling a hearing for November 9, 2011. In the Order, Judge Rakoff said "[t]he Court is required to ascertain whether the proposed judgment is fair, reasonable, adequate, and in the public interest." As a result, he raised a series of questions that he wants answered at that hearing before he will approve the settlement, continuing his pattern of carefully considering each settlement proposed by the SEC in cases assigned to his docket.

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On Wednesday, October 19, 2011, the SEC announced a settlement with Citigroup's principal U.S. broker-dealer, Citigroup Global Markets, Inc., who had been charged with misleading investors about a $1 billion collateralized debt obligation ("CDO") tied to the housing market. The Commission's charges stem from failure to advise investors that at the same time it was selling the CDO, Citigroup "took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value." Citigroup agreed to pay $285 million, which, according to the SEC, made it the third largest recovery for the Commission in enforcement actions against companies whose misconduct occurred leading up to or during the financial crisis.

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The SEC brought a case against Thomas Wu, the former CEO of United Commercial Bank, for misleading investors regarding the financial state of the bank during the 2008 financial crisis. Mr. Wu, who the SEC described as a "rising star in the banking industry," allegedly directed subordinates to conceal information regarding the true value of the bank's collateral and assets, understating the value by at least $65 million and causing as the United Commercial to be one of the ten largest bank failures during the recent financial crisis.

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The SEC announced on Tuesday, September 27 that it had filed a settled administrative proceeding against RBC Capital Markets LLC for misconduct relating to the sale of unsuitable investments (credit-linked notes that were tied to the performance of synthetic collateralized debt obligations or "CDOs") to five Wisconsin school districts. The action is the latest in the SEC's cases arising out of the Financial Crisis of 2008 (the Senate's study of the causes of this crisis is discussed here).

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On Friday September 2, the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac, filed lawsuits in state and federal court in New York and Connecticut against 17 different financial institutions (including Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley and JP Morgan), certain of their officers and various underwriters, alleging violations of the federal securities laws and common law relating to the sale of mortgage-backed securities. In its news release, the FHFA claimed alleged that "the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to" Fannie Mae and Freddie Mac.

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On Thursday, July 21, 2011 (the first anniversary of the passage of the Dodd-Frank Act), SEC Chairman Mary Schapiro testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs regarding the Commission's efforts to fulfill its responsibilities under the Act. During her testimony, she advised the Committee that "the new responsibilities assigned to the agency under the Dodd-Frank Act are so significant that they cannot be achieved solely by wringing efficiencies out of the existing budget without also severely hampering our ability to meet our existing responsibilities." Her prepared remarks during the testimony are available here.

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On June 30, 2011, Lee Farkas, the former Chairman of Taylor Bean & Whitaker ("TBW"), was sentenced to 30 years in prison for his role the failure of his company and of Colonial Bank. While the sentence fell short of the Government's request for a sentence of 385 years, it is likely that the 58-year old Mr. Farkas will spend the rest of his life in jail. 

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On Tuesday, April 19, 2011, in one of the first criminal trials arising out of the market crisis, a federal jury in Alexandria, Virginia convicted Lee Farkas of: one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; four counts of wire fraud; and three counts of securities fraud. The charges arose from Mr. Farkas' role in a $2.9 billion fraud scheme that led to the failure of Colonial Bank (which was one of the 25 largest banks in the United States in 2009), and Mr. Farkas' company, Taylor Bean & Whitaker ("TBW"), one of the largest privately held mortgage lending companies in 2009.

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On Wednesday, April 13, 2011, the Senate's Permanent Subcommittee On Investigations issued its Report entitled: "Wall Street and the Financial Crisis: Anatomy of a Financial Crisis."  " The 639-page Report is "the product of a two-year, bipartisan investigation … into the origins of the 2008 financial crisis." The Subcommittee conducted over 150 interviews and depositions, and accumulated and reviewed tens of millions of pages of documents. The Subcommittee concluded that the financial crisis was "the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street."

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