Second Circuit Vacates Judge Rakoff’s Ruling Rejecting SEC-Citigroup Settlement

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On June 4, the U.S. Court of Appeals for the Second Circuit vacated a November 28, 2011, decision of the U.S. District Court for the Southern District of New York in which the district court declined to approve a settlement of claims that the SEC brought against Citigroup Global Markets Inc. The SEC alleged that Citigroup had negligently misrepresented its role and economic interest in selecting RMBS to be included in the pool of reference obligations in respect of a billion-dollar synthetic CDO transaction. The lower court critiqued the SEC’s practice of settling enforcement actions without requiring defendants to admit fault. The Second Circuit held that the court’s role in approving an SEC settlement is limited to determining whether there is a factual basis to support the proposed consent judgment, that the judgment is fair and reasonable, and, if injunctive relief is imposed by the judgment, that the public interest would not be disserved. The appellate court further ruled that the SEC’s discretion to settle on terms it finds acceptable must be given substantial deference, and held that the lower court misapplied the law and abused its discretion by requiring the parties to show adequacy of the settlement and the truth of the SEC’s allegations. The Second Circuit remanded the case to the district court to again consider settlement approval applying the correct, more deferential standard of review. Decision.

 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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