The Second Circuit appeals court said that District Judge Jed Rakoff abused his discretion when he rejected the $285 million mortgage settlement between the SEC and Citigroup (C). The regulator accused Citigroup of selling sections of Class V Funding III, a $1 billion mortgage-bond deal, without revealing that the bank was betting against $500 million of the assets.
Rakoff, a district court judge, said that he partially blocked the settlement because he didn’t agree with a Commission practice in which the party involved gets to resolve a case without denying or admitting to wrongdoing. Last year the SEC reversed its policy that automatically lets companies settle without making a wrongdoing admission. Now, the regulator is compelling admissions in cases that are especially egregious. Also, following Rakoff’s ruling, other judges followed his lead in a number of lawsuits.
This week, however, the appeals court said that the Commission should be granted wide deference when it is deciding whether or not a case should go to trial or settle. The three-judge panel said the deal between the SEC and Citigroup was in the interest of the public.
The court noted that Rakoff shouldn’t have sought to make the agency establish the veracity of the claims made against the party as a condition for whether he would approve the decree of consent. The Second Circuit said that the district court doesn’t have “purview” to mandate facts.
Now, the appeals court is remanding the mortgage case back to Rakoff. However, he isn’t obligated to okay the deal right away. The court said the judge could still seek additional disclosures from the two parties.
The panel also issued guidelines for how to exercise discretion in federal enforcement cases. As long as the SEC abides by these correct procedures, a judge’s decision-making power would be limited.
The appellate court’s decision is expected to directly affect the $616 million securities fraud settlement reached between SEC and SAC Capital Advisors over insider trading allegations. Although a judge approved the deal last year, the ruling was contingent upon the outcome of the appeal in the Citigroup settlement.
Appeals Court Says Judge Erred in Blocking SEC-Citigroup Settlement, The Wall Street Journal, January 4, 2014
Appeals Court Overturns Decision to Reject S.E.C.-Citigroup Settlement, The NY Times, June 4, 2014
Cohen’s SAC to pay $616 million in SEC insider trade settlement, Reuters, March 15, 2013
More Blog Posts:
$11M Award Against Citi is Vacated by the New York Supreme Court, Stockbroker Fraud Blog, January 30, 2014
SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats, Institutional Investor Securities Blog, May 26, 2012
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011