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S.E.C. v.

Citigroup Global
Markets
George W. Conk
Adjunct Professor of Law & Senior Fellow, Stein Center for Law & Ethics
Room 409
gconk@law.fordham.edu
212-636-7446
Torts Today: http://tortstoday.blogspot.com
Otherwise Commentaries on Law, Language & Politics
Blackstonetoday.blogspot.com
Updated March 3, 2015

SECv. Citigroup Global Markets Remedies


s

The big short

Bail out the insurance company:


http://southpark.cc.com/clips/21
0mw0/bailout

SECv. Citigroup Global Markets Remedies

STAYS

FRCP Rule 8
Notice
Risk of error
Bond

Ch. 4 Injunctions

SEC v. Citigroup (2012 & 2014)


Did Judge Rakoffs rejection of the
proposed settlement and injunction
exceed his powers under FRCP 65 to
take into account the public interest?
Was his order to the SEC and
Citigroup to proceed to trial properly
stayed?
Is there any significant role
remaining for a trial judge to review
a settlement between prosecutor and
regulated entity?
Should there be?
Ch. 4 Injunctions

Rule 8 Stay or Injunction Pending Appeal

(a) Motion for Stay.

(1) Initial Motion in the District Court. A


party must ordinarily move first in the
district court for the following relief:
(A) a stay of the judgment or order of a
district court pending appeal;
(B) approval of a supersedeas bond; or
(C) an order suspending, modifying,
restoring, or granting an injunction
while an appeal is pending.

Ch. 4 Injunctions

Rule 8 Stay or Injunction pending Appeal

(2) Motion in the Court of Appeals;


Conditions on Relief.
A motion for the relief mentioned in
Rule 8(a)(1) may be made to the court
of appeals or to one of its judges.
(A) The motion must:
(i) show that moving first in the district
court would be impracticable; or
(ii) state that, a motion having been
made, the district court denied the
motion or failed to afford the relief
requested and state any reasons given
by the district court for its action.
Ch. 4 Injunctions

Rule 8 Stay or Injunction pending Appeal

(B) The motion must also include:


i) the reasons for granting the
relief requested and the facts
relied on;
(ii) originals or copies of affidavits
or other sworn statements
supporting facts subject to
dispute; and

(iii) relevant parts of the record.


Ch. 4 Injunctions

Rule 8 Stay or Injunction pending Appeal

(C) The moving party must give


reasonable notice of the motion to
all parties.

Ch. 4 Injunctions

Rule 8 Stay or Injunction pending Appeal

(D) A motion under this Rule 8(a)


(2) must be filed with the circuit
clerk and normally will be
considered by a panel of the court.
But in an exceptional case in
which time requirements make
that procedure impracticable, the
motion may be made to and
considered by a single judge.

Ch. 4 Injunctions

Rule 8 Stay or Injunction pending Appeal

(E) The court may condition relief


on a party's filing a bond or other
appropriate security in the district
court.

Ch. 4 Injunctions

10

Citigroup and SEC consent order

(1) a permanent injunction barring


Citigroup violations of SEC Act
(2) disgorge $160 million asserted
net profits usable to compensate
investors
(3) prejudgment interest - $30 million
(4) a civil penalty of $95 million
- no offset vs. civil claims by
investors
- internal changes monitored for 3
years
SECv. Citigroup Global Markets Remedies

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Fair, reasonable, and in the public


interest? Rakoff 2011

The injunctive power of the judiciary


is not a free-roving remedy to be
invoked at the whim of a regulatory
agency, even with the consent of the
regulated.
If its deployment does not rest on
factscold, hard, solid facts,
established either by admissions or
by trialsit serves no lawful or moral
purpose and is simply an engine of
SECv. Citigroup Global Markets Remedies

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2d Circuit remand June 4, 2014


A rubber stamp?

Proof of adequacy is not required


determining whether the proposed
S.E.C. consent decree serves the
public interest...rests squarely with
the S.E.C.
the primary focus of the [District
Court] should be ensuring the
consent decree is procedurally
proper..taking care not to infringe on
the S.E.C.s discretionary authority to
settle
SECv. Citigroup Global Markets Remedies

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Judicial review 2d Cir. 2014

A court should, at a minimum, assess


(1) the basic legality of the decree,
(2) are the terms of the decree clear
(3) does the consent decree reflects
a resolution of the actual claims in
the complaint
(4) is the consent decree tainted by
improper collusion or corruption of
some kind.
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A material omission
Fraudulent Interstate
Transactions
15 U.S.C. 77q
SECv. Citigroup Global Markets Remedies

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Securities Act of 1933


15 USC 77q(a) Fraudulent Interstate Transactions

It shall be unlawful for any person in


the offer or sale of any securities
(1) to employ any device, scheme, or
artifice to defraud, or
(2) to obtain money or property by
means of any untrue statement of a
material fact or any omission to state
a material fact necessary in order to
make the statements made, in light
of the circumstances under which
they were made, not misleading; or
SECv. Citigroup Global Markets Remedies

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Securities Act of 1933


15 USC 77q(a) Fraudulent Interstate Transactions

(3) to engage in any transaction,


practice, or course of business which
operates or would operate as a fraud
or deceit upon the purchaser.

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The complaint
15 USC 77q (a)(2) and (3)

Citigroup Global Markets violated


sections 17(a)(2) and (3) of the
Securities Act of 1933 by negligently
misrepresenting key deal terms,
namely the process by which the
investment portfolio was selected
and Citigroups financial interest in
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The remedies sought

The Commission seeks

injunctive relief

disgorgement of profits

prejudgment interest

civil penalties and

other appropriate and necessary


equitable relief from defendant.
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15 USC 77t Injunctions and


prosecution of offenses

(d)(2) (2)Amount of penalty

(A) (ii)the gross amount of


pecuniary gain to such
defendant as a result of the
violation.

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Synthetic CDO

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SEC v. Citigroup Global


Markets, Inc.
Proposed settlement and
complaint filed
simultaneously October 19,
2011
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A negligence action

Citigroup negligently
misrepresent(ed) key deal
terms

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SEC 43-45: Pitchbook described Citigroup


as Initial CDS Asset Counterparty

Citibank not Credit Suisse selected the assets to be sold as long


positions

Citigroup structured it as a prop


trade

Citigroup had a $500 million short


position of which $490 million was
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SEC: negligent material


omissions

Citigroup play a substantial role in


asset selection
Citigroup had taken a $500 million
short position of which $490 M was
naked short
Citigroup shorted only the names it
selected

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SEC: Citigroup misleading disclosures were


relied upon

Investors believed Citigroup was in


traditional role of an arranging
bank

But did not know Citigroup had


structured the deal and its interests
were adverse to those of the
investors

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SEC v. Citigroup
The Deal
without admitting or denying
the allegations of the
complaint
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Citigroup consents to a final judgment:


Permanently restraining violation of
Sections 17(a)(2) and (3) of the
Securities Act
Pay disgorgement of $160 million
Pre-judgment interest of $30 million
Civil penalty - $95 million
No offset in any related investor
action
Preventive measures: In future closer internal controls and audit;
advice of outside counsel
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The Courts pre-hearing questions


1) Why should the Court impose a
judgment where serious securities
fraud is alleged but the defendant
neither admits nor denies
wrongdoing?
2) Is there an overriding public
interest in determining if the charges
are true? Particularly where there is
no parallel criminal case?
3) What was the total loss at most?
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The Courts pre-hearing questions


4) How was the amount set? Why is
the penalty here less than that in
SEC v. Goldman Sachs?
5) State particularly how you applied
the nine factors you say you consider
in setting penalty amount.
6) How does SEC maintain
compliance with the injunctions?
Does it use contempt proceedings/
7) Why arent the culpable
individuals paying the penalty?
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The Courts pre-hearing questions


8) What control weaknesses
led to the acts alleged? How will
the remedial measures prevent
recurrence?

9) How can a securities fraud of


this magnitude be the result
simply of negligence?
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F.R.C.P. 65 Injunctions
fair reasonable - adequate - in the public
interest

Plaintiffs must show:


(1) unless the restraining order issues, they
will suffer irreparable harm;
(2) the hardship they will suffer absent the
order outweighs any hardship the defendants
would suffer if the order were to issue;
(3) they are likely to succeed on the merits of
their claims;
(4) the issuance of the order will cause no
substantial harm to the public; and
(5) they have no adequate remedy at law.
Ch. 4 Injunctions

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FRCP 65 - d) CONTENTS AND SCOPE OF


EVERY INJUNCTION AND RESTRAINING
ORDER.
( (1)Contents.Every order granting an
injunction and every restraining
order must:
(A) state the reasons why it issued;
(B) state its terms specifically; and
(C) describe in reasonable detail
and not by referring to the complaint
or other documentthe act or acts
restrained or required.
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a very good deal for Citigroup (Rakoff)

Charged only with negligence

Very modest penalty

Injunctive relief of a kind rarely


if ever enforced

Inexpensive prophylactic
measures for 3 years
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What does the settlement lack (Rakoff)

No admission or finding of liability


no collateral estoppel effect for
investors
No Compensation for victims -who
cannot recover for negligence under
10(b)(5)
Penalty low compared to Goldman
Sachs and mere pocket change for
Citibank
SEC contradicts itself by filing
simultaneously against Stoker for
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SEC due deference is due

The courts fairness determination is


within carefully prescribed limits
The court owes SEC substantial
deference as the primary regulatory
authority policing securities markets
especially with respect to matters of
transparency

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SEC due deference is due

Unless a consent decree is unfair,


inadequate, or unreasonable, it
ought to be approved.
Also, the courts should pay deference
to the judgment ofthe government
agency which has negotiated and
submitted the proposed judgment.
SEC v. Randolph, 736 F.2d 525, 529
(9th Cir. Cal. 1984)
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SEC v. Brian Stoker

Stoker intentionally structured


the deal as a tailored
proprietary bet against the
assets in class V III

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SEC v. Brian Stoker


Stokers untrue statements of
material facts or omissions of
material facts operated as a
fraud or deceit upon purchasers of
securities in violation of 17 (a) (2)
and (3) of the Securities Act
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SEC: in assessing penalties we consider:


Corporate benefits from the violation
Impact on injured investors
Need for deterrence
Pervasiveness of the conduct
Degree of scienter
Harm to investors
Difficulty of detection
Voluntary remedial measures
Extent of cooperation with
investigation
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McConnell: judges must be neutral

Judge Rakoff has effectively taken on


the role of a prosecutor, secondguessing the SECs law enforcement
decisions. He may think his
intervention will lead to more
effective enforcement of the
securities laws. But the more likely
result of preventing settlements is to
force companies to defend
themselves in each case with all the
resources at their command,
rendering it impossibly costly for the
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Larson: need for congressional oversight


I certainly understand the frustration
of the court over what it apparently
perceives as persistent and systemic
problems at the SEC, as well as the
extent to which the SEC is effectively
(or ineffectively) fulfilling its mandate
through settlements such as the one
at issue in this case.

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Larson: need for congressional oversight


Those same concerns, however, are
most certainly a proper subject for
congressional oversight, and I would
not be surprised to see this case
serve as a springboard for additional
funding of the SEC by Congress,
perhaps precisely the objective Judge
Rakoff was seeking.

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Wanger: tough call

I side with no one, as the law defines


the standards for approval of a class
action settlement and vests the
assigned judge withdiscretion to
determine whether the overall
settlement is fair, adequate, and
reasonable. A myriad of factors
unique tomaking this determination
are to be considered by the trial
judge.
What record should SEC have to
develop to satisfy a judge a
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NJ LJ: judges are not rubber stamps


Rakoff recognized that substantial
deference was due the SEC but
correctly observed that he had to
exercise independent judgment to
determine the settlement to be fair,
reasonable, adequate and in the
public interest.
The government took the
extraordinary position that the SEC is
the sole determiner of the public
interest regarding consent judgments
in its cases. But as Rakoff pointed
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SEC/Citigroup Motion for


a Stay or Mandamus
2d Circuit: D.J.s Refusal to Approve
Settlement Probably Unwarranted
3/15/2012

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Stay factors to consider

(1) strong showing of likelihood


of success on merits
(2) applicant will suffer
irreparable harm

(3) other parties will be injured


by a stay
(4) a stay is in the public interest
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Rakoffs reasons for refusal to approve


settlement as `fair reasonable,
adequate, and in the public interest

1) Failure of settlement to serve


the public interest

2) Unfairness to Citigroup

3)Absence of basis to assess


fairness
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Rakoff settlement fails public


interest

S.E.C. policy of allowing defendants


to enter consent orders without
admitting or denying the underlying
allegations is hallowed by history
but not by reason
- investors shortchanged w/o
collateral estoppel
Penalties too low - a cost of doing
business
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Rakoff settlement fails public


interest

Unfair to Citigroup because penalties


on the basis of facts neither proven
nor acknowledged carries risks of

abuse
Injunction sought has inadequate
basis in facts established by trial or
admissions
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2d Circuit critique on merits

Rakoff prejudged the facts

Assumed SEC would win at trial

Rakoff did not defer to SECs


judgment on wholly discretionary
matters of policy

Court review of policy-based


settlement decision is minimal
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2d Circuit critique on merits

Requiring an admission of liability


would undermine any chance for
compromise
What is the harm in that?
In school integration cases proof of
past discrimination is a required
element for injunctive relief. [Grant
v. Miami distinguished]
Shouldnt payments of penalties and
damages and injunctive relief have
similar factual support?
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SEC asserts its settlement is in the


public interest

Deference is owed to an executive


branch decision - Agency expertise
- Resolving competing views of the
public interest belongs to the
political branches
- Judicial role not a rubber stamp
but limited to findings of
arbitrariness, capriciousness, etc.
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Will issuance of the stay substantially


injure other persons in the Proceeding

The stay does nothing more than


maintain the status quo existing prior
to the district court's order.
We see no appreciable harm to
anyone from issuing a stay [of the
trial pending appeal].

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Harvey Pitt as amicus in support of


Judge Rakoff

A district court may consider


scienter or lack of it as one of
the aggravating or mitigating
factors to be taken into account
in exercising its equitable
discretion in deciding whether or
not to grant injunctive relief.
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Harvey Pitt as amicus in support of


Rakoff

SEC internal processes address each


factor in its prosecutorial decisions:
fair, reasonable, adequate, in public
interest
SEC is able to answer Rakoffs
questions
Judge must exercise a modicum of
independent judgment
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