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."
The history of the fast-moving saga of SEC v. Citigroup Global Markets, Inc. was discussed in some detail in our Top 10 piece last Friday. In short, on October 19, 2011, the SEC and Citigroup Global Markets agreed to a settlement under the usual neither-admit-nor-deny standard in which the defendant agreed to pay $285 million. On November 28, 2011, Judge Rakoff rejected the proposed settlement with Citigroup in a sharply-worded Order, which was particularly critical of the policy of accepting settlements without an admission of liability. On December 15, 2011, the SEC appealed the matter to the Second Circuit (as did Citigroup) and the following day filed a Motion with Judge Rakoff, asking him to stay the litigation pending the appeal.
But that is when the procedural activities of the parties got even more interesting. The SEC’s Motion before Judge Rakoff required Citigroup to respond by December 30, 2011. Judge Rakoff asked Citigroup to submit a brief with its position sooner – and Citigroup did so, filing its papers (agreeing with the requested stay) on December 20, 2011. Judge Rakoff then "spent the intervening Christmas Holiday considering the parties’ position and drafting an opinion," planning to issue it by the first business day after Christmas (December 27).
However, before noon on December 27, 2011, the SEC filed an emergency motion for a stay before the Second Circuit. The Commission traced the history of the proceedings for the Second Circuit (including its then pending motion to stay before Judge Rakoff and stated:
Because the district court has "failed to afford the relief requested," the Commission moves this Court for a stay on the same grounds that it asserted in the district court. Fed. R. App. P. 8(a)(2)(A)(ii). The Commission seeks a stay on an emergency basis because the January 3 deadline for Citigroup to answer creates an exigency that threatens the Commission with additional irreparable harm.
The SEC also argued that "[i]f Citigroup files its answer, denying some or all of the allegations in the Complaint, or if Citigroup moves to dismiss, challenging the Complaint’s legal sufficiency, it will disrupt a central negotiated provision of the proposed consent judgment pursuant to which Citigroup agreed not to deny the allegations in the Complaint."
At approximately 3:30 pm on December 27, 2011, the attorneys for the SEC and Citigroup telephoned Judge Rakoff so that Citigroup could request leave to exceed the page-limitation when it filed its motion to dismiss the Complaint (which was due on January 3, 2012). As Judge Rakoff noted "[at]t no point in that conversation did the parties reveal that the SEC had moved a few hours earlier for an emergency stay." Judge Rakoff granted the request regarding the page-limitation.
Later that afternoon, at approximately 4:20 pm, the Second Circuit ruled that the emergency motion before it will be submitted to the Second Circuit’s motions panel on January 17, 2012 and that, "[i]n the interim, proceedings in the District Court are stayed until a ruling by the motions panel."
At approximately 4:21 pm, Judge Rakoff, who was "totally unaware" of the events in the Second Circuit, issued his own order, denying the motion for a stay, finding, among other things, that neither the SEC, nor Citigroup Global Markets had a statutory basis for their appeals.
One can imagine that Judge Rakoff was not pleased by these events before the Second Circuit. On Thursday, December 29, 2011, he took the extraordinary step of issuing a Supplemental Order "to make the Court of Appeals aware of this background and to attempt to prevent similar recurrences." He directed the parties to fax to him any filings before the Court of Appeals immediately after they have been filed.
In his Supplemental Order, Judge Rakoff stated that the SEC’s statement to the Court of Appeals regarding the ramifications of Citigroup either filing an answer or a motion to dismiss was "materially misleading" for four reasons:
• a motion to dismiss (unlike an answer) does not constitute an admission or denial, it is a legal challenge to the face of the compliant;
• the SEC was aware that Citigroup planned to move to dismiss (based on the December 27 telephone conference with the Court discussed above) or could have asked Citigroup;
• when seeking a stay before Judge Rakoff, the SEC had not argued that January 3 was a material date; and
• the SEC failed to advise the Court of Appeals that the Supreme Court had previously ruled that "the denial of the fruits of a settlement does not, without more, provide a basis for an interlocutory appeal, let alone a stay," citing Digital Equip. Corp. v. Desktop Direct, Inc., 511 U.S. 863, 884 (1994).
On the same day that Judge Rakoff issued his Supplemental Order, the SEC filed a Petition for a Writ of Mandamus with the Second Circuit, a drastic remedy invoked in extraordinary circumstances, arguing that Judge Rakoff has overstepped his bounds and requesting that the Second Circuit order him "to enter [the] proposed consent judgment" between Citigroup and the Commission. As it explained in a brief on December 30, 2011 (discussed below), the SEC "filed a petition for a writ of mandamus in the event that this Court disagrees about appealability under Section 1292(a)(1), in which case this Court may exercise jurisdiction under 28 U.S.C. 1651."
On December 30, 2011, the SEC filed a supplemental brief in the original appeal, "respond[ing] to the district court’s December 27, 2011 order denying the stay motion … and the district court’s supplemental order of December 29, 2011." The SEC argued that the Second Circuit does have jurisdiction under Carson v. American Brands, 450 U.S. 79 (1981), and that the "denial of a consent decree including injunctive relief is immediately appealable under Section 1292(a)(1)." The Commission further argued that the Digital Equip. decision cited by Judge Rakoff was "irrelevant to the jurisdictional bases asserted by the Commission," because it "did not involve injunctive relief, it did not involve an appeal arising under Section 1292(a)(1), it did not involve a consent judgment proposed by a federal agency, and it did not involve a mandamus petition." The SEC also argued that it did not mislead either the Second Circuit or Judge Rakoff, but that it acted "in good faith."
On Tuesday, January 3, 2011, the Second Circuit issued an Order consolidating the two appeals (the one by the SEC and the one by Citigroup), along with the proceedings involving the petition for a writ of mandamus.
The SEC will undoubtedly want this issue resolved quickly. As Jim Hamilton pointed out in his World of Securities Regulation blog, Judge Rudolph Randa cited Judge Rakoff’s Opinion and Order as a basis to request that the SEC "provide a written factual predicate for why the agency believes the court should find that proposed final judgments in an enforcement action alleging that a company prepared materially inaccurate financial statements and lacked adequate financial controls are fair, reasonable, adequate, and in the public interest" in SEC v. Koss Corporation, No. 2:11-cv-00991 (E.D. Wis.).