On June 4, 2014, the United States Court of Appeals for the Second Circuit vacated and remanded a November 28, 2011 order from the United States District Court for the Southern District of New York refusing to approve a consent decree entered into by the Securities and Exchange Commission (“SEC”) and Citigroup Global Markets, Inc. (“Citigroup”) and setting the case for trial. In doing so, the Second Circuit held that the proper standard for reviewing a consent decree with an enforcement agency requires that a district court: “determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the ‘public interest would not be disserved,’ eBay, Inc. v. MercExchange, 547 U.S. 388, 391 (2006), in the event that the consent decree includes injunctive relief.”
In the underlying case, the SEC alleged that Citigroup had “negligently misrepresented its role and economic interest” in structuring and marketing a” $1 billion fund that was sold to investors.” S.E.C. v. Citigroup Global Mkts., Inc., No. 11-5227-cv(L) (2d Cir. June 4, 2014). According to the SEC, Citigroup told fund investors that an independent investment advisor selected the contents of the fund but Citigroup, not an independent investment advisor, selected “negatively projected mortgage-backed assets” for a large portion of the fund’s contents. Not long after filing suit, the SEC filed a consent judgment for the District Court’s approval. According to the consent judgment, Citigroup would be permanently enjoined from “violating Act Sections 17(a)(2) and (3),” disgorge its $160 million profit, pay an additional $30 million in prejudgment interest, and pay a $95 million civil penalty.
U.S. District Court Judge Rakoff, however, refused to accept the consent judgment and set the case for trial. Judge Rakoff reasoned that “when a public agency asks a court to become its partner in enforcement . . . the court, and the public, need some knowledge of what the underlying facts are.” Id. at 9 (quoting S.E.C. v. Citigroup Global Mkts. Inc., 827 F. Supp. 2d 328, 332 (S.D.N.Y. 2011)). The SEC and Citigroup both appealed, and the SEC sought an emergency stay and writ of mandamus in the Second Circuit.
The Second Circuit found that only the SEC, not the District Court, had the authority to require Citigroup to admit liability in a consent judgment. Therefore, any request Judge Rakoff made for Citigroup to admit or deny liability in the consent judgment was an abuse of his discretion. The Second Circuit also noted that federal policy strongly “favor[s] the approval and enforcement of consent decrees.” Id. (quoting S.E.C. v. Wang, 944 F.2d 80, 85 (2d Cir. 1991).
The Second Circuit also clarified the standard for reviewing a consent judgment. Determining that the traditional standard for reviewing consent judgments, “assessing whether the settlement is fair, reasonable and adequate,” was inaccurate and inappropriate for consent judgments involving enforcement agencies, the Court clarified the standard, holding that a proposed consent decree must be fair and reasonable, with the added requirement that the public interest not be disserved if the consent decree includes injunctive relief. “Absent a substantial basis in the record for concluding that the proposed consent decree does not meet these requirements, the district court is required to enter the order.”
A review of a consent judgment for fairness and reasonableness should, “at a minimum,” determine “the basic legality of the decree, . . . whether the terms of the decree, including its enforcement mechanism, are clear, . . . whether the consent decree reflects a resolution of the actual claims in the complaint[,] and . . . whether the consent decree is tainted by improper collusion or corruption of some kind.” The “primary focus of the inquiry . . . should be on ensuring the consent decree is procedurally proper, using objective measures similar to the factors set out above, taking care not to infringe on the S.E.C.’s discretionary authority to settle on a particular set of terms.”
Judge Rakoff will now review the consent judgment to determine that it is fair, reasonable, and not a disservice to the public interest. Regardless of the outcome, Courts throughout the Second Circuit and elsewhere will take notice of the Second Circuit’s opinion. In a related opinion last April, for example, U.S. District Judge Marrero conditioned approval of a consent judgment between the SEC and investors on the outcome of the Citigroup appeal. There can be little doubt that Judge Rakoff’s decision and the Second Circuit’s reversal will have an important impact on consideration of future consent judgments.
Ben Coulter thanks Katherine West for her work in preparing this post.