NEW YORK - (Mealey's) Ruling that a $285 million
settlement between the Securities and Exchange Commission and Citigroup Global
Markets fails to show how the settlement is in the public's interest, a federal
judge in New York Monday Nov. 28 rejected the parties' proposed consent judgment and set
a July 16 trial date for the action (U.S. Securities and Exchange Commission
v. Citigroup Global Markets Inc., No. 11-7387, S.D. N.Y.; See November
2011, Page 5).
(Opinion
available to Mealey's subscribers. Document
#57-111206-002Z.)
U.S. Judge Jed S. Rakoff of the Southern District of New
York held that "the Court concludes that it cannot approve [the proposed
consent judgment], because the Court has not been provided with any proven or
admitted facts upon which to exercise even a modest degree of independent
judgment."
With regard to the SEC's chosen standard of review for
the instant action, Judge Rakoff found that the proposed consent judgment is
not in the public interest and rejected the SEC's contention that "the public
interest . . . is not part of [the] applicable standard of judicial review."
Injunctive Relief
"A large part of what the S.E.C. requests, in this and
most other such consent judgments, is injunctive relief, both broadly, in the
request for an injunction forbidding future violations, and more narrowly, in
the request that the Court enforce future prophylactic measures (here, for a
three-year period). The Supreme Court has repeatedly made clear, however,
that a court cannot grant the extraordinary remedy of injunctive relief without
considering the public interest," Judge Rakoff said.
Judge Rakoff also disagreed with the SEC's assertion that
if the public interest must be taken into account, the SEC is the sole
determiner of what is in the public interest in regard to consent judgments
settling SEC cases, ruling that this is not the law.
"[A] court, while giving substantial deference to the
views of an administrative body vested with authority or a particular area,
must still exercise a modicum of independent judgment in determining whether
the requested deployment of its injunctive powers will serve, or disserve, the
public interest. Anything less would not only violate the constitutional
doctrine of separation of powers but would undermine the independence that is
the indispensable attribute of the federal judiciary," Judge Rakoff stated.
"As a practical matter . . . the requirement that a
consent judgment be in the public interest is not meaningfully severable from
the requirements, still acknowledged by the S.E.C., that the consent judgment
be fair, reasonable, and adequate; for all these requirements inform each
other."
Insufficient Evidentiary Basis
Moreover, Judge Rakoff held that the proposed consent
judgment is "neither fair, nor reasonable, nor adequate, nor in the public
interest" because "[m]ost fundamentally . . . it does not provide the Court
with a sufficient evidentiary basis to know whether the requested relief is
justified under any of these standards."
"Purely private parties can settle a case without ever
agreeing on the facts, for all that is required is that a plaintiff dismiss his
complaint. But when a public agency asks a court to become its partner in
enforcement by imposing wide-ranging injunctive remedies on a defendant,
enforced by the formidable judicial power of contempt, the court, and the
public, need some knowledge of what the underlying facts are: for
otherwise, the court becomes a mere handmaiden to a settlement privately
negotiated on the basis of unknown facts, while the public is deprived of ever
knowing the truth in a matter of obvious public mportance," Judge Rakoff
explained.
"Here, the S.E.C.'s long-standing policy - hallowed by
history, but not by reason - of allowing defendants to enter into Consent
Judgments without admitting or denying the underlying allegations, deprives the
Court of even the most minimal assurance that the substantial injunctive relief
it is being asked to impose has any basis in fact."
Modest Penalties
Judge Rakoff further determined that "a consent judgment
that does not involve any admissions and that results in only very modest
penalties is just as frequently viewed, particularly in the business community,
as a cost of doing business imposed by having to maintain a working
relationship with a regulatory agency, rather than as any indication of where
the real truth lies. This, indeed, is Citigroup's position in this very
case."
"The point, however, is not that certain narrow interests
of the parties might not be served by the Consent Judgment, but rather that the
parties' successful resolution of their competing interests cannot be
automatically equated with the public interest, especially in the absence of a
factual base on which to assess whether the resolution was fair, adequate, and
reasonable. Even after giving the fullest deference to the S.E.C.'s views
- which have more than once persuaded this Court to approve an S.E.C. Consent
Judgment it found dubious on the merits - the Court is forced to conclude that
a proposed Consent Judgment that asks the Court to impose substantial
injunctive relief, enforced by the Court's own contempt power, on the basis of
allegations unsupported by any proven or acknowledged facts whatsoever, is
neither reasonable, nor fair, nor adequate, nor in the public interest," Judge
Rakoff said.
"It is not reasonable, because how can it ever be
reasonable to impose substantial relief on the basis of mere allegations?
It is not fair, because, despite Citigroup's nominal consent, the
potential for abuse in imposing penalties on the basis of facts that are
neither proven nor acknowledged is patent. It is not adequate, because,
in the absence of any facts, the Court lacks a framework for determining
adequacy. And, most obviously, the proposed Consent Judgment does not
serve the public interest, because it asks the Court to employ its power and
assert its authority when it does not know the facts.
"An application of judicial power that does not rest on
facts is worse than mindless, it is inherently dangerous."
Public Interest
Judge Rakoff also held that an "overriding public
interest in knowing the truth" exists in the instant action and that the SEC,
"of all agencies, has a duty, inherent in its statutory mission, to see that
the truth emerges; and if it fails to do so, this Court must not, in the name
of deference of convenience, grant judicial enforcement to the agency's
contrivances."
The SEC sued Citigroup in the District Court, alleging
that it was negligent in issuing a series of false and misleading statements
concerning the investment quality of a collateralized debt obligation (CDO)
"that was tied to the U.S. housing market in which Citigroup bet against
investors as the housing market showed signs of distress," in violation of
Sections 17(a)(2) and 17(a)(3) of the Securities Exchange Act of 1934.
The SEC also filed a parallel action against Citigroup
employee Brian Stoker, whom the SEC alleged was "primarily responsible
for structuring the CDO transaction"; Credit Suisse Alternative Capital (CSAC),
which "served as the collateral manager for the CDO transaction"; its successor
in interest, Credit Suisse Asset Management (CSAM); and Credit Suisse portfolio
manager Samir H. Bhatt, who was "primarily responsible for the transaction."
At the same time it filed the complaints in the District
Court, the SEC filed a proposed consent judgment and final judgment with regard
to Citigroup, seeking approval of the $285 million proposed settlement, which
requires Citigroup to pay $160 million in disgorgement and another $95 million
in civil penalties and undertake a series of remedial actions "in its review
and approval of offerings of certain mortgage-related securities."
Counsel
The SEC is represented by Matthew T. Martens, Jeffrey T.
Infelise, Kenneth R. Lench, Reid A. Muoio and Thomas D. Silverstein of the SEC
in Washington, D.C.
Citigroup is represented by Brad S. Karp, Susanna M.
Buergel and Theodore Von Wells Jr. of Paul, Weiss, Rifkind, Wharton &
Garrison in New York.
[Editor's Note: Mealey's subscribers may download the
document using the link above. The document(s) are also available to Mealey's
subscribers at www.mealeysonline.com
or by calling the Customer Support Department at 1-800-833-9844.]
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