In a decision issued on March 15, the Second Circuit Court of Appeals issued a stay postponing a trial ordered by Judge Rakoff following his rejection of a settlement in a case brought by the Securities and Exchange Commission against Citigroup Global Markets Inc. Judge Rakoff had rejected the settlement because it did not require Citigroup to admit wrongdoing. His ruling had thrown into question the long-established practice in securities litigation of allowing a settling party to neither admit nor deny allegations as part of a settlement.
On November 28, 2011, Judge Rakoff, who is a judge in the District Court for the Southern District of New York, rejected the settlement and ordered the parties to prepare for a trial. The settlement would have required Citigroup to pay $285 million into a fund that SEC could use to compensate investors for losses incurred in investments a pool of collateralized debt obligations sold by Citigroup; enjoined Citigroup from violating certain sections of the Securities Act of 1933; and to establish procedures to prevent future violations and to make periodic demonstrations of compliance to the SEC.
Because the settlement did not include an admission of liability by Citigroup, the District Court rejected it as "neither reasonable, nor fair, nor adequate, nor in the public interest."
The Second Circuit rejected the District Court's arguments, ruling that:
- Nothing indicated that the SEC failed to consider appropriate factors in making the public policy decision to settle, and that the decision is entitled to deference by the Court;
- There was nothing in the case to suggest that Citigroup did not freely consent to the settlement; and
- The failure of Citigroup to admit liability (or for liability to be proven) could justify the refusal of the settlement.
As a result, the Second Circuit stayed the trial at the District Court level to hear the appeals of the SEC and Citigoup.
The decision can be read in full here: http://www.ca2.uscourts.gov/decisions/isysquery/41d13f99-e1b6-4b0c-bc25-3fdb2c6c8152/4/doc/11-5227_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/41d13f99-e1b6-4b0c-bc25-3fdb2c6c8152/4/hilite/)
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