In Securities & Exchange Commission v. Citigroup Global Markets, Inc., 2012 WL 851807 (2d Cir. Mar. 15, 2012), the United States Court of Appeals for the Second Circuit essentially approved the terms of a settlement between the Securities and Exchange Commission (the “SEC”) and Citigroup Global Markets, Inc. (“Citigroup”) that had been notoriously rejected by the United States District Court for the Southern District of New York (Rakoff, J.) as “neither reasonable, nor fair, nor adequate, nor in the public interest.” Among other things, the district court had found that a crucial factor missing from the parties’ consent judgment was the lack of admission by Citigroup of any liability. This case stands out because, despite that Citigroup was one of the chief actors behind the financial crisis that began in 2008, its primary regulator is under no legal obligation to insist upon an admission of fault or wrongdoing by Citigroup as part of a settlement of all government claims against the bank.
After an extensive investigation into Citigroup’s marketing of collateralized debt obligations (“CDOs”), the SEC filed a complaint charging Citigroup with negligent misrepresentation under 15 U.S.C. §§ 77q(a)(2) and (3). Simultaneously, the SEC and Citigroup presented a proposed consent judgment, pursuant to which Citigroup agreed to (1) pay $285 million into a fund for investors in a pool of CDOs marketed by Citigroup, (2) entry of an order enjoining it from violating the Securities Act of 1933 and (3) establish procedures to prevent future violations and make periodic compliance demonstrations to the SEC.
The district court rejected the settlement for three reasons. First, it reproved the SEC’s “long-standing” policy of entering into consent judgments without requiring the defendant to admit or deny the underlying allegations, because a settlement “without any admissions [of liability] serves various narrow interests of the parties, but not the public interest.” Second, it held that the settlement was unfair because it unreasonably “impose[d] substantial relief [on Citigroup] on the basis of mere allegations.” Third, it held that the settlement disserved public interest because “without admission of liability, a consent judgment involving only modest penalties gives no indication of where the real truth lies.”
The SEC appealed and moved for a stay of the proceedings in the district court pending its appeal. Citigroup joined with the SEC in all of its arguments.
The Second Circuit considered and rejected each of the district court’s reasons for refusing to approve the consent judgment. The district court found that the settlement offended public interest because Citigroup’s penalty was merely “pocket change,” and the SEC got nothing but a “quick headline.” The Second Circuit held that this determination was flawed because it assumed Citigroup’s liability and gave no deference to the SEC’s wholly discretionary policy choice of whether to settle with Citigroup or pursue it through litigation. The Court indicated it had no reason to doubt that the SEC had taken the public interest in to account because the settlement called for payment by Citigroup of $285 million, “which would be available for compensation of investors who lost money.”
The Court rejected the district court’s characterization of the settlement as “unfair” to Citigroup, noting that contradicted the district court’s concurrent assessment of the settlement amount as “pocket change” and a “mild and modest cost of doing business” for Citigroup. Furthermore, the Court noted that a district court’s legitimate concern does not include protection of “a private, sophisticated, counseled litigant from a settlement to which it freely consents.”
Finally, the Court rejected the district court’s determination that it had no basis to assess the underlying facts absent an admission of liability by Citigroup, referring to the “substantial evidentiary record,” and the SEC’s provision of information regarding how the evidence supported the proposed consent judgment.
The Court held that the movants demonstrated a strong likelihood of success in overturning the district court’s ruling. Considering the remaining prongs of the test, the Court observed that the parties would suffer irreparable harm without a stay, reasoning that the district court’s requirement of an admission from Citigroup essentially precluded any possibility of settlement, leaving the parties no option but to incur substantial costs of litigating their dispute. Lastly, the Court explained that the SEC’s assertion that “its settlement is in the public interest and that its access to a stay so as to protect the settlement is also in the public interest” should not be questioned or rejected by a court “without substantial reason for doing so,” and went on to find no such reason.
Citigroup demonstrates the Second Circuit’s unwillingness to intrude upon the realm of executive agencies. The decision clearly admonished the district court, and warned against interference with or dictating the terms of the arrangements made between public regulatory agencies and the business entities they regulate, even when such entities are the focus of intense public scrutiny about its business practices.