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.
As previously discussed here, in a November 28, 2011 Opinion and Order, Judge Rakoff rejected the SEC’s proposed settlement with Citigroup for $285 million because "the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest." On December 15, 2011, the SEC appealed the Opinion and Order and Robert Khuzami, the Director of the Division of Enforcement, 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" (discussed here).
In its brief in support of the motion to stay (available here), the SEC argues that, because it has filed a Notice of Appeal, Judge Rakoff no longer has jurisdiction of the matter. In most cases, an appeal is not filed until there is a final judgment in the case, and there is no such final judgment here – Judge Rakoff has consolidated the case with a related matter brought by the Commission, SEC v. Stoker , No. 11-civ-7388 (S.D.N.Y. Filed Oct. 19, 2011), and set a trial date of July 16, 2012. Nevertheless, the SEC asserts that because the central issue on appeal is the request by both parties "to resolve the dispute on mutually agreeable terms, precluding a proceeding that would otherwise continue," the Appeal filed by the Commission "divests the Court of jurisdiction over the proceedings while its appeal is pending."
As an alternative argument, the SEC argues that, to the extent the SEC retains jurisdiction, the agency is entitled to an interlocutory appeal. As part of that legal theory, the Commission is obligated to demonstrate "the likelihood of success on appeal." As a result, the SEC’s Motion sets forth why it believes Judge Rakoff committed error in rejecting the settlement. The SEC defended its decision to settle the case by stating:
The Commission’s mission is to protect investors, and the proposed settlement accomplished that mission because Citigroup disgorged all its ill-gotten gains and agreed to a penalty that was more than half of the maximum that the Commission could have obtained at trial under the applicable statute ($95 million, as compared with $160 million). In other words, the proposed resolution here – including the injunctive relief – reasonably reflects the relief that the Commission would likely recover were it to prevail in litigation of this matter. The Commission made the reasonable judgment that expending additional resources to attempt to obtain an adjudication of the facts is not justified in light of the adequacy of the relief obtained, the litigation risks associated with trial, and the need to devote those resources to other matters.
The SEC also responded to Judge Rakoff’s concern about the fact that Citigroup did not admit or deny wrongdoing by pointing out that "the public was adequately informed about" what Citigroup did through the Commission’s detailed complaint, which Citigroup did not contest. The SEC further argues that it is likely to prevail on appeal because Judge Rakoff’s Opinion and Order runs afoul of: "(1) the well-established and oft-approved practice of federal agencies entering into consent judgments providing for injunctive relief in which defendants do not admit to the allegations in the complaint; (2) the federal policy favoring settlements by consent judgment; and (3) the strong deference afforded to federal agencies presenting proposed consent judgments for approval."
In its brief (available here), Citigroup joined in the SEC’s motion, arguing that "[b]ecause of the profound and far-reaching importance of this issue and the other substantial issues implicated by this Court’s Order, and the significant consequences to the Company and to shareholders of Citigroup Inc. … of being required to litigate this matter while the Second Circuit considers the parties’ appeals, … a stay pending appeal is appropriate." The company further argues that "[p]roceeding with this litigation would expose [the company and Citigroup Inc.’s] shareholders to the very litigation risks and potential collateral consequences that Citigroup [Inc.]’s Board of Directors and senior management sought to avoid by agreeing to a negotiated resolution of this matter with the SEC."
Judge Rakoff is faced with a similar situation: both sides agree on what should be done (stay the litigation) – just as they were two months ago when they agreed to settle the case. But, as has already been demonstrated, just because the SEC and the defense agree upon it, it is not a sure thing that Judge Rakoff will agree. Whether he will accept their arguments and allow the Second Circuit to review his decision, or hold the parties’ feet to the proverbial fire (which may result in a different settlement which he does find acceptable) remains to be seen.
On a different note, on behalf of all of us at Porter Wright who contribute to Federal Securities Law Blog, we want to take a moment to wish all of you a very Happy Holiday!!