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.

The SEC announced its settlement with Citigroup Global Markets on Wednesday, October 19, 2011, while charging the broker-dealer with misleading investors about a $1 billion collateralized debt obligation ("CDO") tied to the housing market. The Commission’s charges stem from a 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." In the settlement, Citigroup agreed to pay $285 million (consisting of $160 million in disgorgement, $30 million in prejudgment interest and a $95 million civil penalty) which is to be returned to investors and which the SEC touted as the third largest recovery for the Commission in enforcement actions relating to the recent financial crisis.

On Tuesday, October 25, 2011, the SEC filed a Consent and a proposed Judgment in this case. The SEC has previously submitted a memorandum in support of the proposed settlement, laying out the reasons the Court should approve the settlement.

Judge Rakoff has previously rejected a proposed settlement submitted by the SEC (in its case against Bank of America) and rejected other arguments by the Commission in another case (such as Rajat Gupta’s suit against the Commission as described here). The Judge has scheduled a hearing for November 9, 2011 and listed nine specific subjects which will be "[a]mong the questions (without limitation) that the Court will want answered at this hearing." The questions raised by Judge Rakoff include:

• "Why should the Court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?"

• "Given the SEC’s statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the SEC’s charges are true? Is the interest even stronger when there is no parallel criminal case?"

• "What was the total loss to the victims as a result of Citigroup’s actions? How was this determined? If, as the SEC’s submission states, the loss was "at least" $160 million … what was it at most?"

• "How was the amount of the proposed judgment determined?" Judge Rakoff pointed out that the $95 million penalty portion of the settlement was considerably less than the $535 million penalty paid by Goldman Sachs in 2010 and questioned whether there would be "a meaningful deterrent effect." He also asked which factors were used to assess the amount of the penalty (citing an earlier SEC statement regarding nine factors that are used).

• "The proposed judgment imposes injunctive relief against future violations. What does the SEC do to maintain compliance? How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?"

• "Why is the penalty in this case to be paid in large part by Citigroup and its shareholders rather than by the ‘culpable individual offenders acting for the corporation?’ … If the SEC was for the most part unable to identify such alleged offenders, why was this?"

• "What specific ‘control weaknesses’ led to the acts alleged in the Complaint? … How will the proposed ‘remedial undertakings’ ensure that those acts do not occur again?

• How can a securities fraud of this nature and magnitude be the result simply of negligence?

Judge Rakoff invited the parties to submit briefs answering these questions (provided that they did so by November 7). The answers may, at the least, provide some insight (at least more than usually seen) into how the Commission approaches its settlement negotiations. Moreover, it may require the SEC to explain its policies in negotiating and accepting settlements, many of which have been long-standing and rarely questioned.


The Federal Securities Law Blog is honored to be named as one the Top 25 Business Law Blogs of 2011 by LexisNexis (and greatly appreciates those of you who voted for our blog out of the "long list" of 80 blogs earlier this month). The announcement for the Top 25 is here and includes a link to allow you to vote for the Top Business Blog by November 5, 2011. We are very grateful for your continued readership and would appreciate your vote.