United States: Second Circuit Vacates Judge Rakoff’s Decision Refusing To Approve Citigroup’s "Neither Admit Nor Deny" Settlement With The SEC And Clarifies Standard For Evaluating Consent Decrees In Favor Of Pragmatism

The Second Circuit's long-awaited decision in SEC v. Citigroup Global Markets, Inc.,1 released on June 4, 2014, held that Judge Jed S. Rakoff of the Federal District Court for the Southern District of New York abused his discretion in refusing to approve a proposed consent decree between the Securities and Exchange Commission and Citigroup.2 The Second Circuit vacated the decision of the court below3 and remanded, clarifying the appropriate standard of review to preclude judicial evaluation of the "adequacy" of a consent decree. The Circuit held that the standard for reviewing a consent decree is simply whether it is "fair and reasonable," thereby limiting the District Court's substantive review of consent decrees to a significant extent. The Second Circuit also emphasized the discretionary power of the SEC in determining how to prosecute and settle enforcement actions, recognizing that the decision to settle a given case is a pragmatic one based on numerous factors. The Circuit held that the "exclusive right" to decide the charges to be asserted against a defendant rests with the SEC, and that the SEC's determination regarding whether a consent decree serves the public interest "merits significant deference."4 This decision should allay defendants' concerns that they will be forced to provide a binding admission before a settlement will be approved in civil district court proceedings, often a major issue in civil actions brought by regulators such as the SEC. It should not be viewed, however, as a signal that the SEC will abandon attempts to obtain such admissions when it deems appropriate, whether in the civil or administrative context.


When deciding whether to approve consent decrees between the SEC and private parties, certain courts within the Second Circuit (including the District Court in this action) have evaluated whether the proposed settlement is "fair, reasonable and adequate."5 Where injunctive relief is included in the proposed consent decree, courts also must conclude that the "public interest would not be disserved."6 The Circuit observed that the "adequacy" requirement "appears borrowed from the review applied to class action settlements" where it makes "perfect sense" because such settlements may preclude future claims, and that this is not an issue with SEC consent decrees, where potential plaintiffs may bring their own actions.7



The SEC filed a complaint against Citigroup in October 2011 alleging that Citigroup negligently misrepresented its role and financial interest in a billion-dollar fund known as "Class V Funding III," alleging that Citigroup influenced the selection of approximately half of the fund's assets, contrary to its statement to investors that the fund's portfolio would be selected by an independent investment advisor.8 These securities were largely collateralized by subprime securities tied to the U.S. housing market.9 The SEC further alleged that Citigroup selected for inclusion in the fund a significant amount of mortgage-backed securities in which Citigroup had taken a short position, resulting in a $160 million profit to Citigroup, while fund investors incurred significant losses.10

When filing the complaint, the SEC also filed a proposed consent decree with Citigroup in which Citigroup would agree to: (1) a permanent injunction prohibiting Citigroup from violating Sections 17(a)(2)-(3) of the Securities Act of 1933; (2) disgorge $160 million (Citigroup's alleged profits); (3) pay prejudgment interest of $30 million; and (4) pay a civil penalty of $95 million.11 Citigroup further would agree not to seek an offset against any compensatory damages awarded in any related investor action and consent to make internal changes, spanning three years, to prevent similar acts from reoccurring.12

District Court Ruling

In the decision below, Judge Rakoff criticized the proposed consent decree, comparing it unfavorably with the civil penalty imposed by consent decrees approved in other SEC cases.13 He commented that the proposed consent decree would transform the court into "a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance."14 He then refused to approve the consent decree, consolidated the case with SEC v. Stoker,15 a related case in which the SEC asserted claims against a Citigroup employee allegedly involved in the matter, and set a trial date.16

Second Circuit's Decision

As noted above, following the District Court's ruling, the parties immediately filed for a stay pending interlocutory appeal, which was granted by the Second Circuit.17 Both the SEC and Citigroup advocated for reversal. The Second Circuit reversed the District Court's ruling, clarified the applicable standard of review, and remanded the case to Judge Rakoff for reconsideration of the proposed consent decree to "consider whether the public interest would be disserved by entry of the consent decree."18

The Circuit "quickly dispense[d]" with the argument that the District Court had abused its discretion by requiring an admission of liability as a prerequisite to approving the proposed consent decree, as pro bono counsel appointed to represent the District Court stated that the Court had not conditioned its approval on an admission of liability. The Circuit expressly stated that "there is no basis in the law . . . to require an admission of liability as a condition for approving a settlement . . . . [That decision] rests squarely with the S.E.C."19

The Circuit next addressed the scope of deference district courts should afford proposed consent decrees and noted the strong federal policy favoring their enforcement and approval. In furtherance of this policy, the Circuit clarified that the appropriate inquiry is whether proposed consent decrees are "fair and reasonable" and, in cases where injunctive relief is requested, ensuring that the public interest would not be disserved.20 Notably, the Circuit explicitly rejected the concept of "adequacy" from the standard, observing that the concept appears to be borrowed from the review applied to class action settlements which "strikes us as particularly inapt in the context of a proposed S.E.C. consent decree."21 The Circuit explained that while analyzing class actions for adequacy is logical because they preclude future civil claims, SEC consent decrees do not pose this problem.22

Detailing the requirements of the "fair and reasonable" standard, the Circuit held that a court analyzing proposed SEC consent decrees "should, at a minimum," assess: (1) the basic legality of the decree; (2) whether the terms of the decree, including its enforcement mechanism, are clear; (3) whether the decree reflects a resolution of the claims asserted; and (4) whether it is "tainted by improper collusion or corruption of some kind."23 The "primary focus of the inquiry . . . should be on ensuring the consent decree is procedurally proper, using objective measures . . ., taking care not to infringe on the S.E.C.'s discretionary authority to settle on a particular set of terms."24

The Circuit held that the District Court had abused its discretion by requiring the SEC to establish the "truth" of the allegations against the settling party as a precondition for approving a consent decree.25 The Circuit noted that while trials are "primarily about the truth," settlements like consent decrees are "primarily about pragmatism" and "provide parties with a means to manage risk."26 The Circuit also noted that the SEC is tasked with assessing whether settling makes sense, and that such an assessment involves numerous factors including the likelihood of success and the costs and benefits of proceeding to trial.27 As the Circuit conclusively held, "[i]t is not within the district court's purview to demand 'cold, hard, solid facts, established either by admissions or by trials'...."28 The Circuit noted that "the district court here, with the benefit of copious submissions by the parties, likely had a sufficient record before it to determine if the proposed decree was fair and reasonable."29

Finally, the Court addressed whether the "public interest would be disserved" by the consent decree because it included injunctive relief, but proceeded to hold that "[t]he job of determining whether the proposed S.E.C. consent decree best serves the public interest . . . rests squarely with the S.E.C., and its decision merits significant deference."30 The Circuit noted that the District Court "correctly recognized that it was required to consider the public interest," but held that its improper definition of the "public interest" as "'an overriding interest in knowing the truth'" constituted legal error.31 The Circuit further held that it was an abuse of discretion "[t]o the extent the district court withheld approval of the consent decree on the ground that it believed the S.E.C. failed to bring the proper charges against Citigroup."32 The Circuit also noted that a district court may not reject consent decrees because they fail to provide collateral estoppel assistance to private litigants because "that simply is not the job of the courts."33


The Second Circuit's decision in Citigroup has several important implications for litigants and subjects of regulatory investigations. First, it reaffirms the broad, discretionary powers of the SEC to manage its own cases and determine whether settlement is an appropriate course of action in a given case. Second, the clarified standard of judicial review for consent decrees significantly reduces the ability of district courts to reject such settlements, because the "adequacy" of the settlement is not a valid consideration. Finally, it should allay concerns of civil defendants (or entities under civil investigation) that they will be required to admit liability in order to settle. This is particularly important in light of the potential collateral estoppel effects such an admission in a civil matter may have in related civil litigation.34 Although it is now clear that the SEC is not required to seek admissions to obtain approval of a consent decree, it still has free reign to seek them (whether in the civil or administrative context), and has signaled that it will continue to do so when appropriate.


1 Docket Nos. 11–5227–cv (L), 11–5375–cv (con), 11–5242–cv (xap.), 2014 WL 2486793 (2d Cir. June 4, 2014) ("Citigroup II").

2 Following Judge Rakoff's order setting a trial date, in March 2012 a Second Circuit motions panel stayed the lower court proceedings pending this appeal. SEC v. Citigroup Global Markets, Inc., 673 F.3d 158, 169 (2d Cir. 2012).

3 SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011) ("Citigroup I").

4 Citigroup II, 2014 WL 2486793, at *9-10.

5 See, e.g., SEC v. Cioffi, 868 F. Supp. 2d 65, 74 (E.D.N.Y. 2012) (emphasis added); SEC v. CR Intrinsic Investors, LLC, 939 F. Supp. 2d 431, 434 (S.D.N.Y. 2013).

6 eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006).

7 See Citigroup II, 2014 WL 2486793, at *7.

8 Id. at *1.

9 Id.

10 Id.

11 Id.

12 Id.

13 These cases were: SEC. v. Bank of Am. Corp., No. 09 Civ. 6829 (JSR), 2010 WL 624581 (S.D.N.Y. Feb. 22, 2010); SEC v. Goldman, Sachs & Co., No. 10 Civ. 3229 (BSJ), Docket No. 25 (S.D.N.Y. July 20, 2010).

14 Citigroup I, 827 F. Supp. 2d at 332.

15 Docket No. 11 Civ. 7388 (JSR).

16 Citigroup I, 827 F.

18 Citigroup II, 2014 WL 2486793, at *9 (holding that the court below incorrectly defined the "public interest" as an overriding interest in the truth). The Circuit also noted that on remand, "if the district court finds it necessary," that it may ask the parties to provide additional information to alleviate any concerns regarding potential collusion between the parties. Id. At *8.

19 Id. at *6.

20 Id. at *7.

21 Id.

22 Id.

23 Id.

24 Id.

25 Id. at *8.

26 Id. (emphasis added).

27 Id.

28 Id. (quoting Citigroup I, 827 F. Supp. 2d at 335).

29 Id.

30 Id. at *9. For example, the Circuit explained that if injunctive relief in a consent decree were to bar private litigants from "pursuing their own claims independent of the relief obtained under the consent decree," the public interest may be disserved Id.

31 Id. at *10 (quoting Citigroup I, 827 F. Supp. 2d at 331).

32 Id.

33 Id.

34 When not actually litigated, such admissions may not result in collateral estoppel, but may be considered evidentiary admissions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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