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SEC files to appeal Judge Rakoff's rejection of Citi settlement

On November 28th, U.S. District Court Judge Jed S. Rakoff, in a 15 page opinion, rejected the proposed agreement between Citigroup and the Securities and Exchange Commission to settle charges filed by the SEC against Citigroup accusing the company of "selling investors slices of a $1 billion mortgage-bond deal called Class V Funding III, without disclosing it was betting against $500 million of those assets." The bulk of Judge Rakoff's criticism was aimed at the SEC's standard settlement practice of permitting agreements where the accused company does not deny nor admit wrongdoing.

The SEC filed a notice of appeal yesterday, seeking appellate review in the Second Circuit of Judge Rakoff's order rejecting the settlement.

The SEC also released a statement:

We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits. For this reason, today we filed papers seeking review of the decision in the U.S. Court of Appeals for the Second Circuit.

We believe the court was incorrect in requiring an admission of facts -- or a trial -- as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions. Indeed, in the case against Citigroup, the SEC filed suit after a thorough investigation, the findings of which were described in extensive detail in a 21-page complaint.

The court's new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country. In fact, courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide.

The case is SEC v. Citigroup Global Markets Inc, No. 11-07387 (S.D.N.Y).

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.