On Monday, May 14, 2012, both the SEC and the Citigroup Global Markets, Inc. filed their appellate briefs (available here and here) in the three consolidated appeals regarding Judge Jed Rakoff’s November 28, 2011 Opinion and Order rejecting the SEC’s proposed settlement with Citigroup. Both entities argued that Judge Rakoff committed error in his Opinion and Order, arguing, among other things, that it was contrary to well-established law to reject a consent settlement with a federal agency because it was not supported by admitted or judicially established facts. Both parties also argued that the settlement between them was fair, reasonable and adequate. A Brief in support of the district court’s position will be filed in August 2012.
For those who have not reviewed the case in a while, the key events in the underlying litigation (and the initial steps of the appeal) were as follows:
• 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;
• when asked to approve the settlement, Judge Rakoff he asked the parties to answer a series of questions and the SEC responded on November 7, 2011;
• on November 28, 2011, Judge Rakoff rejected the proposed settlement with Citigroup as "neither fair, nor reasonable, nor adequate, nor in the public interest," criticizing the long-standing policy of accepting settlements without an admission of liability as "hallowed by history, but not by reason," and ruling that the Commission’s request that the Court assert its authority without knowing the facts was "inherently dangerous";
• on December 15, 2011, the SEC appealed the matter to the Second Circuit (and Citigroup also filed a cross-appeal);
• on December 28, 2011, the Second Circuit ruled that an emergency motion by the SEC would be submitted to that Court’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;"
• on December 29, 2011, the SEC filed a Petition for a Writ of Mandamus with the Second Circuit, 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; and
• on March 15, 2012, the Second Circuit’s Motion Panel granted the SEC’s motion to stay the District Court proceedings, finding that that the Commission and Citigroup "made a strong showing of likelihood of success" in either their appeals or petition for mandamus.
The SEC’s Brief. In its Brief, the SEC raised four key points. First, the Commission argued that Judge Rakoff erred requiring that the proposed consent judgment be supported by admitted or judicially established facts – such a ruling was contrary to established law. The SEC argued that various Government agencies have often resolved matters through consent judgments, and for decades, courts has approved such consent judgments, even if the defendants do not admit the allegations in the Complaint.
Second, the SEC argued that Judge Rakoff did not give proper deference to the Commission’s assessment that the consent judgment satisfied the agency’s enforcement objectives. As a result, the Court was interfering with the powers of the Commission, which have been entrusted to the executive branch by the Constitution.
Third, the Commission argued that the settlement with Citigroup was fair, reasonable, adequate, and in the public interest. The SEC pointed to the fact that it obtained the injunctive relief it requested in the complaint and agreed to a monetary settlement for $285 million, which the Commission argued was more than 80% of what it could have reasonably expected to obtain if it prevailed at trial. For example, examining one part of the $285 million settlement, the Commission argued that the largest penalty it could have recovered at trial was $160 million, so a settlement for a $95 million penalty was reasonable. The SEC also argued that Judge Rakoff erred by evaluating the settlement based upon claims that the Commission did not bring and considering whether private litigants would be able to argue "collateral estoppel" based on such a settlement (which would require an admission).
Finally, the SEC argued that, if the Appellate Court determined that it did not have jurisdiction for a direct appeal of the Opinion and Order (Judge Rakoff had previously ruled that neither the SEC, nor Citigroup Global Markets had a statutory basis for their appeals), it should grant the Commission’s petition for a writ of mandamus because, among other reasons, "the Commission will "have no other adequate means to attain the relief it desires.’" The Commission further stated because Judge Rakoff ordered the parties to prepare for trial, it "will lose the benefit of the bargain it struck," and it be required to expend resources and face the litigation risks "that it sought to avoid when it exercised its reasonable judgment to enter into the consent judgment," and, as a result, a writ of mandamus was appropriate.
Citigroup’s Brief. The Brief filed by Citigroup raised a number of the same arguments. For example, Citigroup said it was not required and it was "unprecedented" for the Court to condition a settlement on the parties’ ability to provide proven or acknowledged facts. Citigroup further argued that the standard in Judge Rakoff’s Opinion and Order "would undermine the strong federal policy favoring the resolution of litigation through settlement." Specifically, Citigroup asserted that "private parties can ill afford the risks of agreeing to a consent judgment predicated on an admission of wrongdoing given the potentially devastating collateral consequences posed by private litigation premised on such admissions."
The Next Step. In granting the Motion to Stay on March 15, 2012, the Second Circuit’s Motion Panel noted that "because both parties to the litigation are united in seeking the stay and opposing the district court’s order, this panel has not had the benefit of adversarial briefing." The Panel then ruled that "[i]n order to ensure that the panel which determines the merits receives briefing on both sides, counsel will be appointed to argue in support of the district court’s position." At the present time, the brief by that attorney, John "Rusty" Wing of Lankler Siffert & Wohl LLP (who Judge Rakoff recommended and the Second Circuit appointed), is due on August 13, 2012.