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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions