Second Circuit Effectively Reverses Rejection of SEC's Settlement with Citigroup

by Sheppard Mullin Richter & Hampton LLP

In Securities & Exchange Commission v. Citigroup Global Markets, Inc., 2012 WL 851807 (2d Cir. Mar. 15, 2012), the United States Court of Appeals for the Second Circuit essentially approved the terms of a settlement between the Securities and Exchange Commission (the “SEC”) and Citigroup Global Markets, Inc. (“Citigroup”) that had been notoriously rejected by the United States District Court for the Southern District of New York (Rakoff, J.) as “neither reasonable, nor fair, nor adequate, nor in the public interest.” Among other things, the district court had found that a crucial factor missing from the parties’ consent judgment was the lack of admission by Citigroup of any liability. This case stands out because, despite that Citigroup was one of the chief actors behind the financial crisis that began in 2008, its primary regulator is under no legal obligation to insist upon an admission of fault or wrongdoing by Citigroup as part of a settlement of all government claims against the bank.

After an extensive investigation into Citigroup’s marketing of collateralized debt obligations (“CDOs”), the SEC filed a complaint charging Citigroup with negligent misrepresentation under 15 U.S.C. §§ 77q(a)(2) and (3). Simultaneously, the SEC and Citigroup presented a proposed consent judgment, pursuant to which Citigroup agreed to (1) pay $285 million into a fund for investors in a pool of CDOs marketed by Citigroup, (2) entry of an order enjoining it from violating the Securities Act of 1933 and (3) establish procedures to prevent future violations and make periodic compliance demonstrations to the SEC.

The district court rejected the settlement for three reasons. First, it reproved the SEC’s “long-standing” policy of entering into consent judgments without requiring the defendant to admit or deny the underlying allegations, because a settlement “without any admissions [of liability] serves various narrow interests of the parties, but not the public interest.” Second, it held that the settlement was unfair because it unreasonably “impose[d] substantial relief [on Citigroup] on the basis of mere allegations.” Third, it held that the settlement disserved public interest because “without admission of liability, a consent judgment involving only modest penalties gives no indication of where the real truth lies.”

The SEC appealed and moved for a stay of the proceedings in the district court pending its appeal. Citigroup joined with the SEC in all of its arguments.

The Second Circuit considered and rejected each of the district court’s reasons for refusing to approve the consent judgment. The district court found that the settlement offended public interest because Citigroup’s penalty was merely “pocket change,” and the SEC got nothing but a “quick headline.” The Second Circuit held that this determination was flawed because it assumed Citigroup’s liability and gave no deference to the SEC’s wholly discretionary policy choice of whether to settle with Citigroup or pursue it through litigation. The Court indicated it had no reason to doubt that the SEC had taken the public interest in to account because the settlement called for payment by Citigroup of $285 million, “which would be available for compensation of investors who lost money.”

The Court rejected the district court’s characterization of the settlement as “unfair” to Citigroup, noting that contradicted the district court’s concurrent assessment of the settlement amount as “pocket change” and a “mild and modest cost of doing business” for Citigroup. Furthermore, the Court noted that a district court’s legitimate concern does not include protection of “a private, sophisticated, counseled litigant from a settlement to which it freely consents.”

Finally, the Court rejected the district court’s determination that it had no basis to assess the underlying facts absent an admission of liability by Citigroup, referring to the “substantial evidentiary record,” and the SEC’s provision of information regarding how the evidence supported the proposed consent judgment.

The Court held that the movants demonstrated a strong likelihood of success in overturning the district court’s ruling. Considering the remaining prongs of the test, the Court observed that the parties would suffer irreparable harm without a stay, reasoning that the district court’s requirement of an admission from Citigroup essentially precluded any possibility of settlement, leaving the parties no option but to incur substantial costs of litigating their dispute. Lastly, the Court explained that the SEC’s assertion that “its settlement is in the public interest and that its access to a stay so as to protect the settlement is also in the public interest” should not be questioned or rejected by a court “without substantial reason for doing so,” and went on to find no such reason.

Citigroup demonstrates the Second Circuit’s unwillingness to intrude upon the realm of executive agencies. The decision clearly admonished the district court, and warned against interference with or dictating the terms of the arrangements made between public regulatory agencies and the business entities they regulate, even when such entities are the focus of intense public scrutiny about its business practices.

For further information, please contact John Stigi at (310) 228-3717 or Sarah Aberg at (212) 634-3091.


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.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

Written by:

Sheppard Mullin Richter & Hampton LLP

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.