THE STAKES GET HIGHER

THE STAKES GET HIGHER

 

Judge Rakoff, in a December 27, 2011 order, denied the Commission's request for a stay of his order directing SEC v. Citigroup Global Markets, Inc., Case No. 11 Civ 7387 (S.D.N.Y.) to trial. That order, which followed the refusal of the District Court to enter a proposed settlement agreed to by the SEC and Citigroup, set up a high stakes gamble for the SEC in the Circuit Court as discussed here.

The SEC raised the stakes. The agency filed a Petition for a Writ of Mandamus and a Supplemental Memorandum in Support Of Its Unopposed Motion To Stay The Proceedings Below And To Expedite The Appeal in the Second Circuit Court of Appeals.

The Petition for a Writ is essentially a back up to the interlocutory appeal under Section 1292(a)(1). In its petition the Commission argues that under Section 1292(a)(1) its appeal is entirely proper. If however it is not, the SEC claims it has a "clear and indisputable right" (quoting SEC v. Rajaratnam, 622 F. 3d 159 (2nd Cir. 2010)) to a writ because the "district court clearly erred." These conclusions are directly contrary to the findings of the District Court in its December 27th order.

The Commission's supplemental memorandum defends both the appeal and the petition for a writ while offering insights into the agency's views of the dispute. First, its appeal under Section 1291(a)(1) is proper, according to the filing. This is because "the district court's order rejecting the proposed consent judgment [had] the practical effect of denying an injunction." Indeed, it was the request for injunctive relief that "animated the district court's erroneous decision . . . " to reject a settlement negotiated and agreed to by the parties, according to the Commission. The refusal to enter the settlement will also cause the Commission irreparable harm by forcing it to incur the costs and risks of a trial that "it had sought to avoid . . ." The fact that the parallel case is proceeding to trial does not detract from this point, the Commission argues, because the cases are not identical and the SEC has a finite budget which means shifting resources from one case deprives another.

Second, mandamus is appropriate because absent an interlocutory appeal, the Commission contends that it will not have any alternative remedy. This point is fortified by the fact that the issue here is novel, significant and its resolution will aid the administration of justice.

Finally, the Commission grounds these arguments not just on its right to negotiate a settlement under terms it chooses, but essentially but on the notion that it had no choice but to file an appeal and seek a stay. In rejecting the settlement the District Court essentially demanded an admission along with additional remedial procedures to prevent a repetition of the underlying conduct, according to the filing. The District Court also "did not express any willingness to consider further proposals; it unequivocally directed the parties to prepare for trial .. ."

Whether the Commission's only choice was to pursue an interlocutory appeal or a writ of mandamus is, at best, unclear. It does not appear that the District Court invited the parties to renegotiate the settlement. At the same time, the Court made its objections to the proposed settlement clear. Equally apparent is the fact that the SEC did not propose alternative settlement terms. Before pursuing its current high stakes approach, prudence would surely dictate that the agency at least make an effort.

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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