The Second Circuit’s decision in SEC v. Citigroup Global Markets Inc., Dkt No. 11-5227-cv-(Lead) (2d Cir. 2012), presents issues related to international practice only indirectly. But the principles are of significance and so will undoubtedly affect international practice. At issue in the case is whether the federal district court correctly refused to approve a settlement between the SEC and Citigroup of claims arising out of the international collateralized debt obligation issues that plagued many financial institutions and have been said to relate to the financial crisis of 2008 and forward. The SEC and Citigroup reached a settlement whereby Citigroup would pay $285 million into a fund and agree to other non-monetary relief. However, as is common, Citigroup would not be admitting (nor denying) the SEC’s allegations of wrongdoing. The District Court refused to approve the settlement, and the Second Circuit stayed the decision below so that full briefing and decision could occur. To do so the Circuit needed to find that the proponents of the settlement would likely prevail in the appellate court. And it is the Circuit’s discussion of that issue that is the most topical for us. Among other things:
First, the Second Circuit addressed the District Court’s comment referring to “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”. The District Court used that reasoning to conclude that the SEC’s settlement was not entitled to significant deference, since by definition the settlement was not one imbued with the government’s efforts to enhance the public interest but was rather the exercise of litigation strategy more akin to what private parties engage in. The Court of Appeals’s felt that it was likely — not a certainty, but likely — that this view is wrong. The Court of Appeals was concerned that the District Court did not give the SEC’s judgment sufficient deference on a “wholly discretionary matter of policy”.
Second, the Court of Appeals rejected the notion that the settlement was not favorable to Citigroup.
Third, and also significant, the District Court determined that it could not evaluate the fairness of the settlement unless the underlying facts were conclusively established by a trial or a binding admission of liability. The Court of Appeals rejected, again tentatively, the District Court’s position, saying that the lower court’s position was “tantamount to ruling that . . . a court will not approve a settlement that represents a compromise”. We do not read the District Court’s opinion the same way; but the Second Circuit underscored the tentative nature of its view.