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."
In his Monday ruling, Judge Rakoff not only rejected the proposed settlement with Citigroup as "neither fair, nor reasonable, nor adequate, nor in the public interest," he accused the SEC of searching for "a quick headline," stated that they had argued the wrong legal standard, criticized the long-standing policy of accepting settlements without an admission of liability as "hallowed by history, but not by reason," and called the Commission’s request that the Court assert its authority without knowing the facts "worse than mindless, it is inherently dangerous."
Mr. Khuzami defended the settlement, claiming it "was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial." He countered the Court’s criticism of "lack-of-an-admission" issue:
The court’s criticism that the settlement does not require an "admission" to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial. It also ignores decades of established practice throughout federal agencies and decisions of the federal courts. Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court.
He noted that such settlements have been "repeatedly approved for good reason by federal courts across the country."
The Director continued that assert that, despite the lack of an admission, the allegations in the Complaint provide the basis for the proposed settlement: "These are not ‘mere’ allegations, but the reasoned conclusions of the federal agency responsible for the enforcement of the securities laws after a thorough and careful investigation of the facts."
Mr. Khuzami also accused the Court of overlooking "the fact that securities law generally limits the disgorgement amount the SEC can recover to Citigroup’s ill-gotten gains, plus a penalty in an amount up to a defendant’s gain," asserting that the limitations was the "reason that [the SEC] sought to recover close to $300 million," and not a larger amount.
While the SEC continues to review Judge Rakoff’s ruling, the Commission and Citigroup now find themselves facing an upcoming series of deadlines. Judge Rakoff’s Monday order consolidated the Citigroup case with a related matter, SEC v. Stoker , No. 11-civ-7388 (S.D.N.Y. Filed Oct. 19, 2011), which already has a case management order in place. The parties are expected to complete discovery by April 30, submit summary judgment briefs by May 7 and, based on Monday’s order, be prepared to try the matter on July 16, 2012.