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The battle lines have been drawn over the proposed
settlement in the SEC's action against Citigroup Global Markets, Inc. SEC v.
Citigroup Global Markets, Inc., Civil Action No. 1:11-cv-07387 (S.D.N.Y.) (here). Judge Rakoff entered an
order posing a series of questions to the parties (here). The SEC has filed a brief
essentially arguing for deference to its prosecutorial discretion (here). That filing was followed by
a memorandum from Citigroup. A new wrinkle is the request by Better Markets,
Inc., a nonprofit, to intervene and object to the settlement.
Citigroup's memorandum argues four key points in support
of the settlement. First, for many of the questions posed by the Court the firm
defers to the SEC. Thus for questions about whether the settlement should be
based on "not admitting or denying," if there is an overriding public interest
in determining if the allegations in the complaint are true and other similar
matters, Citigroup "defers to the SEC with respect to its enforcement policies
and practices, and agency decisions . . ." At the same time the firm notes, in
a fashion which echoes the SEC's memorandum, that the court has a limited role
and should give substantial deference to the Commission.
Second, Citigroup exercised its business judgment in
deciding to accept the settlement. For every litigant there are significant
concerns involved in litigating with the SEC. Those are magnified for financial
institutions. The impact of litigating with the Commission is well illustrated
by the Goldman Sachs case. There Goldman chose not to immediately
settle. When the complaint was filed its stock dropped over 10% in the first
thirty minutes of trading following the announcement of the filing.
Subsequently, the price of Goldman shares fell about 24% in the period prior to
settlement with the Commission.
Third, the remedies in the proposed settlement are more
than adequate in view of the allegations in the complaint. In this regard "the
Complaint alleges that CGMI [Citigroup] negligently failed to provide adequate
disclosures to a small number of ultra-sophisticated, institutional investors
that purchased Class V securities. . .The Complaint does not allege that
shareholders of Citigroup were harmed. . . " The amounts to be paid by
Citigroup, coupled with the procedures which must be put in place, are more
than sufficient to guard against any repetition. This is particularly true in
view of the fact that a new management team is in charge at Citigroup.
Finally, the proposed settlement is a win-win for
everyone: "We respectfully submit that the proposed settlement advances the
interest of both the alleged victims of CGMI's misconduct - through
disgorgement of the alleged profits (plus interest), the imposition of a
penalty, and the distribution of those funds to the Class V investors through
establishment of a fair fund - and Citigroup's shareholders. . . . the
Company's management elected to resolve this matter through settlement . .
.precisely to avoid the potential harm that flows from litigation, including
the potential loss of shareholder value . .. "
In contrast Better Markets objects to the settlement. The
firm describes itself as "a non-profit organization that promotes the public
interest in the financial markets. Better markets advocates for greater
transparency, accountability, and oversight. . . " In moving to intervene
Better Markets briefly sketches three key objections to the settlement: 1) It
fails to hold employees or senior executives accountable; 2) it imposes
sanctions that are "woefully inadequate in relation to the egregious nature of
the fraudulent conduct . . ." and 3) "the proposed Settlement will signal an
unacceptable tolerance for fraudulent conduct in the securities markets and it
will confirm that sanctions imposed in SEC enforcement actions are so minimal
that they may safely be regarded as a cost of doing business - and a small cost
at that." The memorandum attaches news articles critical of the proposed settlement
including one from Bloomberg citing the fact that Citigroup has settled on
similar terms with the SEC in the past. The SEC objects to the proposed
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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