SEC Unhappy Camper

In a December 15, 2011, press release titled "SEC Enforcement Director's Statement on Citigroup Case," then SEC Division of Enforcement Director Robert Khuzami stated:

Last month, a federal district court declined to approve a consent judgment because, in its view, the underlying allegations were ‘unsupported by any proven or acknowledged facts.' As a result, the court rejected a $285 million settlement between the SEC and Citigroup that reasonably reflected the relief the SEC would likely have obtained if it prevailed at trial.

We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits. . .

Khuzami further opined that the court was

incorrect in requiring an admission of facts - or a trial - as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions. . .

Khuzami pointedly took issue with the prospect that the courts would no longer sanction SEC settlements where a defendant does not admit liability. Apparently, Khuzami feared that the detriment of such a judicial prerequisite to approving settlements would over-burden the SEC by reducing the number of cases likely to settle and prompting increasing numbers of resource-consuming trials.   For Khuzami, a by-product of such a compulsion to resolution by trial would be that:

other frauds might never be investigated or be investigated more slowly because limited agency resources are tied up in litigating a case that could have been resolved.

Finally, Khuzami bristled at the court's references to the substantial size of Defendant Citigroup. The Director of Enforcement argued that " the law does not permit the Commission to seek penalties based upon a defendant's wealth." 

On Hold

On December 15, 2011, the SEC filed a Notice of Appeal seeking a ruling by 2Cir that would reverse Judge Rakoff's rejection of the proposed consent judgment and his order directing the parties to prepare for trial in July 2012. 

On March 15, 2012, 2Cir set aside Judge Rakoff's rejection of the settlement.

2Cir's Rationale

Below find extracts (with page noted after each quote) from the 2Cir Opinion:

In particular, today's majority opinion makes clear that district courts assessing a proposed consent decree should consider principally four factors: "(1) the basic legality of the decree; (2) whether the terms of the decree,including its enforcement mechanism, are clear; (3) whether the consent decree reflects a resolution of the actual claims in the complaint; and (4) whether the consent decree is tainted by improper collusion or corruption of some kind. . .

It is an abuse of discretion to require, as the district court did here, that the S.E.C. establish the "truth" of the allegations against a settling party as a condition for approving the consent decrees. Citigroup I, 827 F. Supp. 2d at 332‐33. Trials are primarily about the truth. Consent decrees are primarily about pragmatism. . .

The job of determining whether the proposed S.E.C. consent decree best serves the public interest, however, rests squarely with the S.E.C., and its decision merits significant deference. . .

The district court correctly recognized that it was required to consider the public interest in deciding whether to grant the injunctive relief in the proposed injunction. Citigroup I, 827 F. Supp. 2d at 331. However, the district court made no findings that the injunctive relief proposed in the consent decree would disserve the public interest, in part because it defined the public interest as "an overriding interest in knowing the truth." Id. at 335. The district court's failure to make the proper inquiry constitutes legal error.

To the extent the district court withheld approval of the consent decree on the ground that it believed the S.E.C. failed to bring the proper charges against Citigroup, that constituted an abuse of discretion.

For the courts to simply accept a proposed S.E.C. consent decree without any review would be a dereliction of the court's duty to ensure the orders it enters are proper.