Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, December 16, 2011

SEC Appeals Judge Rakoff's Rejection of Citigroup Settlement

The rumors have been out there for days, and yesterday the SEC's Enforcement Division filed a notice of appeal of Judge Rakoff's rejection of the Citigroup settlement.  An issue that I have not seen addressed is whether a judicial rejection of a proposed settlement is an appealable final order. My colleague Professor Michael Solimine refers me to Digital Equipment Corp. v. Desktop Direct, Inc., 511 U.S. 863 (1994), interpreting the “final order” language of 28 U.S.C. sec. 1291.  I welcome the thoughts of other civil procedure scholars.

Here is an excerpt of Mr. Khuzami's statement about why the SEC decided to appeal:

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.

In cases such as this, a settlement puts money back in the pockets of harmed investors without years of courtroom delay and without the twin risks of losing at trial or winning but recovering less than the settlement amount - risks that always exist no matter how strong the evidence is in a particular case. Based on a careful balancing of these risks and benefits, settling on favorable terms even without an admission serves investors, including investors victimized by other frauds. That is due to the fact that other frauds might never be investigated or be investigated more slowly because limited agency resources are tied up in litigating a case that could have been resolved.

In contrast, the new standard adopted by the court could in practical terms press the SEC to trial in many more instances, likely resulting in fewer cases overall and less money being returned to investors.

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