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.
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