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.

As discussed here, the Commission filed its Complaint against Citigroup on October 19, 2011 in federal court in New York, where it alleged that "[t]he marketing materials Citigroup prepared and distributed to investors did not disclose Citigroup’s role in selecting assets for [a $1 billion collateralized debt obligation ("CDO")] and did not accurately disclose to investors Citigroup’s short position on those assets." The SEC claimed that after the CDO defaulted within months, investors were saddled with losses, but Citigroup made $160 million in fees and trading profits. Citigroup agreed to pay $285 million in settlement (consisting of $160 million in disgorgement, $30 million in prejudgment interest and a $95 million civil penalty). In that settlement, under a long-standing SEC policy, Citigroup did not admit or deny liability.

In an October 27, 2011 Order (discussed here), Judge Rakoff scheduling a hearing for November 9, 2011 to "ascertain whether the proposed judgment is fair, reasonable, adequate, and in the public interest." In addition, he raised a series of questions, including:

• "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?"

On, November 7, 2011, the SEC filed its Brief in response to Judge Rakoff’s questions (as discussed in greater detail here). 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 SEC argued that use of such consent judgments in which the SEC alleges a serious securities fraud, but the defendant neither admits nor denies wrongdoing "has been long endorsed by the Supreme Court" and "criticism of consent decrees for not including … an admission is ‘unjustified.’" The SEC traced the history of its policy, emphasizing the desire to "preclude denials both in the consent decree itself and elsewhere." The Commission argued that, based on the fact that Citigroup does not deny the allegations in the Complaint, the "approach has clearly succeeded in clearly conveying that the conduct alleged did in fact occur."

• The SEC further responded by stating its position that transparency was provided "by the public filing of the allegations in the Commission’s Complaint, which Citigroup has not denied." The SEC argued that requiring a factual resolution in the name of transparency would run afoul of the principal that the settlement not be turned into a trial.

According to the Bloomberg article, Judge Rakoff continued to question the SEC’s counsel about this issue at the November 9, 2011 hearing, quoting the Court:

I’m not quite sure I understand why this practice, admittedly a practice that has existed for many decades, of accepting a settlement in which the defendant neither admits nor denies liability makes any sense when we are talking about a public agency like the SEC.

Judge Rakoff further questioned whether there was a public interest in determining if the allegations were true. Matthew Martens of the SEC responded by pointing out that the SEC "made very detailed allegations. …They are not denying that the allegations are so. And so we believe that that package leaves the public with a clear understanding of what in fact occurred here sufficient to serve the public interest." If Citigroup was to admit the allegations, it would have a significant impact on any private litigation brought by investors.

As the article points out, Judge Rakoff can only accept or reject the settlement – he cannot rewrite it to impose terms on the parties. Both J. Robert Brown Jr. of the University of Denver Sturm College of Law and Mark Fickes, a partner at BraunHagey & Borden LLP told Bloomberg that if the Judge does reject the settlement, the parties are likely to renegotiate, with Citigroup having to pay a higher amount to settle.