Securities Law Prof Blog

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

Friday, February 8, 2013

Oral Argument in SEC v. Citigroup

William Alper, a Manhattan attorney, attended the oral argument today in SEC v. Citigroup at the request of the Securities Law Prof Blog and filed the following report.  He cautions that it is difficult to convey accurately the Q&A, but I think you'll agree that he has done a darn good job in capturing the essence.  He notes that although the oral argument was scheduled for only 29 minutes, it went on much longer than that.  The judges asked many questions and were obviously engaged.

Securities and Exchange Commission v Citigroup Global Markets Inc.
Oral Argument
February 8, 2013
United States Court of Appeals
For the Second Circuit

Judges: Rosemary S. Pooler, Raymond J. Lohier, Jr., Susan L. Carney

 The courtroom was so overcrowded that additional seating was set up in the ante room where more than 50 people watched on closed circuit TV.  SEC v Citigroup was first on the calendar and once the argument was concluded nearly everyone inside or outside the courtroom left.

SEC’s Argument

Counsel for SEC began by arguing that the District Court (Judge Rakoff) had adopted an inappropriate “bright line” rule.  Question was asked whether the District Court had said held the parties had provided insufficient information to warrant approval of the settlement/injunction but that the SEC contended the information provided was sufficient.  Counsel answered that the information provided was sufficient.  Asked by a judge what information was available to Judge Rakoff, SEC counsel referred to the Complaint, the settlement agreement negotiated by counsel at arms’ length, that it contained no ambiguity and that it did not require excess resources to enforce.

Asked by a judge whether the allegations in the Complaint were sufficient to support approval of the settlement, SEC counsel argued that they were.  He was then asked whether more information had been available to the Court which approved settlement in the Bank of America case, counsel agreed, but noted that Bank of America had agreed to submission of a statement of facts without admitting to any of them and had given the District Court additional evidence.

One of the judges noted that Judge Rakoff had not been satisfied with the answers supplied by the parties to his 9 questions.  SEC counsel agreed, but noted that many of Judge Rakoff’s questions were policy questions and that Judge Rakoff had complained, in refusing to approve the settlement, that he’d been provided no facts established by trial or by admission.

A judge asked whether Judge Rakoff should not have asked for more facts and SEC counsel said that under the law, it wouldn’t have been necessary for approval of the settlement.

A judge asked whether the District Court was entitled in deciding whether to approve the settlement to look at the complaint in Stoker.  SEC counsel replied that it was beyond the legitimate scope of the District Court’s review of the settlement.  That SEC refused to bring additional charges in light of Stoker was permissible, because SEC, as a government agency, has discretion and the District Court is not entitle to go beyond that.  The District Court’s power to review the settlement is limited to the injunctive relief, e.g., to determine whether there were ambiguous terms in the settlement.

Q: How could the District Court assess whether third parties would be harmed by the settlement with only the Complaint to go on? Could it ask 3d parties to submit facts?

A: That could happen in, e.g., a Title VII case, where the potential for harm to 3d parties is much more apparent, but not here.

Q: Why was an injunction necessary at all, in light of the fact the SEC almost never takes action to enforce them?

A: The possibility of enforcement proceedings is “useful” and has collateral effect as, for example, in SEC v. Cioffi, (EDNY(?)).

Citigroup’s Argument

Judge Rakoff asked for admissions from Citigroup that could be used for collateral estoppel purposes.

Q: What if the district court asked for facts “short of admissions”?

A: The District Court had ample “evidence” from the complaint, the SEC’s 28 page response to the District Court’s 9 questions and Citi’s 20 page response to them.  All of the questions were fully answered. WARNING: Corporations won’t settle if findings that could be used for collateral estoppel purposes were made or required.  2d Circuit precedent states that the District Court shouldn’t second guess the agency and defendant.

Q: Didn’t the District Court say it could not exercise its judgment and couldn’t make a judgment?

A: District Court said that either trial or admissions [to establish facts] were required.

Q: What if the District Court required something more than it was given, but short of admissions, should the Court of Appeals remand?

A: Many more words with colorful analogies but, “No.”

Q: Didn’t Harvy Pitt say the SEC could meet the District Court’s requirements?

A: The law doesn’t require admissions by settling party to settle or for District Court to approve settlement.

Q: The “admissions” argument is a “red herring” because the District Court didn’t and couldn’t demand them.

Pro Bono Counsel's Argument

Basic disagreement among the parties is what the District Court actually required of the parties: Appellants argue he required admissions or a trial to establish facts.  That’s just not so.

Q: District Court’s Order, p. 4, states that the court hadn’t been given proven or admitted facts.  Doesn’t that require admissions or trial to establish facts?

A: District Court didn’t require an admission of liability, but rather facts that could be the basis for proof of liability.  The “proof” could be documents, deposition testimony.

Q: So the Court’s ruling requires proof from the parties?

A: None was required, but there’s no rule that the District Court can’t ask, and Citi did provide evidence in support of it’s application to the Court for a stay, stating that courts can require evidentiary submissions. The District Court also had admissions from the 2 criminal cases.

Q: Did the acquittal in Stoker support the settlement in this case?

A: Yes, it would have, but it occurred after the District Court had already made its decision in this case.  It might be sufficient now [on remand].

Q: You agree that the District Court can’t require an admission of liability?

A: Yes.

Q: Would it be inappropriate to ask for facts necessary to establish liability?

A: It isn’t necessary to determine liability and the District Court’s questions and the answers did not.

Q: Did the Bank of America settlement establish facts estopping B of A?

A: No.

Q: But Bank of America settlement led to the filing of many lawsuits based on the facts of that case?

A: Yes, but without collateral estoppel/factual findings that could be used in subsequent cases.

Q: Why is an Article III judge entitled to determine what’s necessary in the public interest instead of the relevant agency?

Rule 23, and the fact that the settlement incorporated an injunction subject to judicial enforcement.

Q: SEC acknowledged a gap between total damage caused by the alleged acts and the amount Citigroup agreed to pay.

A: This case is different from Stoker: No criminal charges, not allegations of Citi’s scienter.

Q: Why isn’t it the SEC’s responsibility to determine the strength of its own cases, as other agencies and prosecutors do?

A: The SEC can, it is entitled to deference, but the District Court is not required to approve automatically what the SEC has agreed to.  It has its own standards to apply and uphold.

Q: SEC/Citi argue that many facts were given to the court.

A: No evidence, e.g., deposition testimony, was submitted.

Q: It isn’t sufficient for the agency to state important facts, the District Court may require sworn testimony, affidavits?

A: The submissions were “lawyer talk”, not “proof” or “evidence”.

Q: In light of the results in Stoker, does the District Court now have sufficient information?

A: Yes.

Counsel (Wing): The statement at the end of the District Court’s opinion was a “rhetorical flourish”.

Q: After Stoker, what is there left for the District Court to do on remand?

A: Stoker resolves Judge Rakoff’s questions and shows why the District Court was properly concerned.

Q: It showed the weakness of the SEC’s case?

A: Yes, but now the District Court has that information to us in doing its job.

SEC’s Rebuttal

Rule 23 is very different from this case because District Courts have a fiduciary responsibility to protect others, not, as here, where there’s an agency entitled to deference.

Q: What relief should we give, reverse and approve the settlement?

A: Yes.

Q: In light of Stoker, should we direct approval of the settlement on remand or just give the District Court the opportunity to take Stoker into account?

A: Yes, and perhaps give the parties a chance to back out of the settlement.

Citi’s Rebuttal

Q: Can’t we remand with an opportunity for the parties to appeal immediately if they wish?

A: Stoker is not a case to which Citi was a party – it can’t be the basis for fact finding in this case.


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