Second Circuit Reverses SDNY In SEC-Citigroup Settlement Case

by Burr & Forman

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.


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.

© Burr & Forman | Attorney Advertising

Written by:

Burr & Forman

Burr & Forman 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.