On Remand, SEC-Citigroup Settlement Reluctantly Approved

In June, we blogged about the Second Circuit's opinion reversing Judge Rakoff's denial of a consent decree between the Securities and Exchange Commission ("SEC") and Citigroup.

Last week, on remand, Judge Rakoff reluctantly approved the consent decree stating, "That Court [the Second Circuit] has not fixed the menu, leaving this Court with nothing but sour grapes." Ouch.

Let's take a look at the settlement, the opinion, and how we got here.

The Settlement

The settlement approved is largely the same as the proposed settlement that Judge Rakoff initially rejected. In trying to conclude the litigation initiated by the SEC against Citigroup on behalf of Citigroup investors that suffered losses, Citgroup agreed to: (1) not violate Sections 17(a)(2) and (3) of the Securities Act; (2) pay a civil penalty of $95 million; (3) disgorge $160 net profits from alleged negligent conduct; and (4) pay prejudgment interest of $30 million -- all payable within 14 days of entry of judgement. In addition, for a period of three years, Citigroup's marketing materials are subject to review and consultation, and a series of audits and compliance certifications are required.

The Second Circuit

In June, the Second Circuit reversed Judge Rakoff's decision to reject the consent decree, and instead set a trial date. The Second Circuit found that Judge Rakoff had abused his discretion and applied the wrong standard. Instead, Judge Rakoff was instructed to review the consent decree to determine whether it "is fair and reasonable, with the additional requirement that the 'public interest would not be disserved.'"

Judge Rakoff Grudgingly Approves

On August 5, Judge Rakoff entered an order approving the consent decree, and he also authored a separate accompanying opinion. In it, he calls the standard that the Second Circuit articulated as "modest" but also realizes that "it would be a dereliction of duty for this Court to seek to evade the dictates of the Court of Appeals."

Judge Rakoff cautioned, "Nonetheless, this Court fears that, as a result of the Court of Appeal's decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary's contempt powers will in practice be subject to no meaningful oversight whatsoever."

Whether Judge Rakoff is right, we'll have to see. This is certainly not the last SEC settlement we'll see arising from the 2008 economic fallout.

Related Resources:

• Judge Rakoff Says 2011 S.E.C. Deal With Citigroup Can Close (The New York Times)
• DOJ and Citigroup Settle Mortgage Securities Dispute for $7Billion (FindLaw's U.S. Second Circuit Blog)
• 2nd Cir Hears from Rakoff, SEC Regarding Settlements (FindLaw's U.S. Second Circuit Blog)
• Will Judge Rakoff Be Represented in Second Cir. Citigroup Appeal? (FindLaw's U.S. Second Circuit Blog)