Citigroup

Describes motivation process for creativity with emphasis on intrinsic motivation by Corey K Katir

The past week has been a busy one for those following the debate over the SEC’s policy of accepting a settlement without an admission or denial of the facts. On Monday, the SEC and Citigroup filed their briefs defending the “neither-admit-nor-deny” policy in the appeal of Judge Rakoff’s Opinion and Order refusing to approve their settlement (as discussed here). On Thursday, May 17, 2012, Robert Khuzami appeared before the House Committee on Financial Services to testify about that very policy. In doing so, Mr. Khuzami discussed the Commission’s policy and approach to settling matters and defended the policy and the settlement in the Citigroup Global Markets litigation.

The November 28, 2011 Opinion and Order of Judge Rakoff (which criticized the SEC’s decades-long policy of accepting settlements without an admission of liability as “hallowed by history, but not by reason”) not only triggered the appellate litigation, but sparked Congressional interest as well. On Friday, December 16, 2011 (the day after the Commission appealed Judge Rakoff’s decision), the House Committee on Financial Services announced that it would “hold a hearing next year to examine the practice by the Securities and Exchange Commission of settling cases with defendants that neither admit nor deny complaints made by the SEC.” At the time, Committee Chairman Spencer Bachus (R-AL) said “[t]he SEC’s practice of using ‘no-contest settlements’ has raised concerns about accountability and transparency,” while Ranking Member Barney Frank (D-MA) expressed the view that the practice “raises serious issues.”

In his testimony before the Committee on Thursday, Mr. Khuzami began by emphasizing some of the statistics from the last fiscal year, highlighting the record number (735) of enforcement actions brought in FY 2011 (a fact he has previously raised, but has been questioned in some reports) and stressing that over the last three years “numerous cases … involve highly complex financial products, market practices, and transactions where the investor harm is great, the investigatory hurdles are significant, and the perpetrators most elusive.” With that background, he turned to the issue before the Committee and explained that the SEC’s settlement policies “serve the critical enforcement goals of accountability, deterrence, investor protection, and compensation to harmed investors.”

Mr. Khuzami shed some light on the factors that the SEC considers when deciding to settle a matter:

Under existing policy, the Division of Enforcement recommends that the Commission settle a case only when our informed judgment tells us that the settlement agreement is within the range of outcomes we reasonably can expect if we litigate through trial. In making that determination, we take into account many factors, including: (i) the strength of the evidence and the potential defenses, including the possibility that the Commission might not prevail at trial, or prevail but be awarded less than the proposed settlement achieves; (ii) the delay in returning funds to harmed investors caused by litigation; and (iii) the resources required for a trial, including, most importantly, the opportunity costs of litigating rather than devoting those resources to investigating other cases.

He acknowledged that it “may require some measure of reasonable compromise,” but stressed that the policy “is calibrated to redress wrongs committed by securities law violators, preclude wrongdoers from working with the investing public in the future, reform company practices, deter similar misconduct by others, and return funds directly to harmed investors in a timely manner.”

On Monday, May 14, 2012, both the SEC and the Citigroup Global Markets, Inc. filed their appellate briefs (available here and here) in the three consolidated appeals regarding Judge Jed Rakoff’s November 28, 2011 Opinion and Order rejecting the SEC’s proposed settlement with Citigroup. Both entities argued that Judge Rakoff committed error in his Opinion and Order, arguing, among other things, that it was contrary to well-established law to reject a consent settlement with a federal agency because it was not supported by admitted or judicially established facts. Both parties also argued that the settlement between them was fair, reasonable and adequate. A Brief in support of the district court’s position will be filed in August 2012.

For those who have not reviewed the case in a while, the key events in the underlying litigation (and the initial steps of the appeal) were as follows:

• on October 19, 2011, the SEC and Citigroup Global Markets agreed to a settlement under the usual neither-admit-nor-deny standard in which the defendant agreed to pay $285 million;

• when asked to approve the settlement, Judge Rakoff he asked the parties to answer a series of questions and the SEC responded on November 7, 2011;

• on November 28, 2011, Judge Rakoff rejected the proposed settlement with Citigroup as “neither fair, nor reasonable, nor adequate, nor in the public interest,” criticizing the long-standing policy of accepting settlements without an admission of liability as “hallowed by history, but not by reason,” and ruling that the Commission’s request that the Court assert its authority without knowing the facts was “inherently dangerous”;

• on December 15, 2011, the SEC appealed the matter to the Second Circuit (and Citigroup also filed a cross-appeal);

• on December 28, 2011, the Second Circuit ruled that an emergency motion by the SEC would be submitted to that Court’s motions panel on January 17, 2012,” and that “[i]n the interim, proceedings in the District Court are stayed until a ruling by the motions panel;”

• on December 29, 2011, the SEC filed a Petition for a Writ of Mandamus with the Second Circuit, arguing that Judge Rakoff has overstepped his bounds and requesting that the Second Circuit order him “to enter [the] proposed consent judgment” between Citigroup and the Commission; and

• on March 15, 2012, the Second Circuit’s Motion Panel granted the SEC’s motion to stay the District Court proceedings, finding that that the Commission and Citigroup “made a strong showing of likelihood of success” in either their appeals or petition for mandamus.

The SEC’s Brief. In its Brief, the SEC raised four key points. First, the Commission argued that Judge Rakoff erred requiring that the proposed consent judgment be supported by admitted or judicially established facts – such a ruling was contrary to established law. The SEC argued that various Government agencies have often resolved matters through consent judgments, and for decades, courts has approved such consent judgments, even if the defendants do not admit the allegations in the Complaint.

Second, the SEC argued that Judge Rakoff did not give proper deference to the Commission’s assessment that the consent judgment satisfied the agency’s enforcement objectives. As a result, the Court was interfering with the powers of the Commission, which have been entrusted to the executive branch by the Constitution.

Third, the Commission argued that the settlement with Citigroup was fair, reasonable, adequate, and in the public interest. The SEC pointed to the fact that it obtained the injunctive relief it requested in the complaint and agreed to a monetary settlement for $285 million, which the Commission argued was more than 80% of what it could have reasonably expected to obtain if it prevailed at trial. For example, examining one part of the $285 million settlement, the Commission argued that the largest penalty it could have recovered at trial was $160 million, so a settlement for a $95 million penalty was reasonable. The SEC also argued that Judge Rakoff erred by evaluating the settlement based upon claims that the Commission did not bring and considering whether private litigants would be able to argue “collateral estoppel” based on such a settlement (which would require an admission).

Finally, the SEC argued that, if the Appellate Court determined that it did not have jurisdiction for a direct appeal of the Opinion and Order (Judge Rakoff had previously ruled that neither the SEC, nor Citigroup Global Markets had a statutory basis for their appeals), it should grant the Commission’s petition for a writ of mandamus because, among other reasons, “the Commission will “have no other adequate means to attain the relief it desires.’” The Commission further stated because Judge Rakoff ordered the parties to prepare for trial, it “will lose the benefit of the bargain it struck,” and it be required to expend resources and face the litigation risks “that it sought to avoid when it exercised its reasonable judgment to enter into the consent judgment,” and, as a result, a writ of mandamus was appropriate.

Citigroup’s Brief. The Brief filed by Citigroup raised a number of the same arguments. For example, Citigroup said it was not required and it was “unprecedented” for the Court to condition a settlement on the parties’ ability to provide proven or acknowledged facts. Citigroup further argued that the standard in Judge Rakoff’s Opinion and Order “would undermine the strong federal policy favoring the resolution of litigation through settlement.” Specifically, Citigroup asserted that “private parties can ill afford the risks of agreeing to a consent judgment predicated on an admission of wrongdoing given the potentially devastating collateral consequences posed by private litigation premised on such admissions.”

The Next Step. In granting the Motion to Stay on March 15, 2012, the Second Circuit’s Motion Panel noted that “because both parties to the litigation are united in seeking the stay and opposing the district court’s order, this panel has not had the benefit of adversarial briefing.” The Panel then ruled that “[i]n order to ensure that the panel which determines the merits receives briefing on both sides, counsel will be appointed to argue in support of the district court’s position.” At the present time, the brief by that attorney, John “Rusty” Wing of Lankler Siffert & Wohl LLP (who Judge Rakoff recommended and the Second Circuit appointed), is due on August 13, 2012.

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In Securities & Exchange Commission v. Citigroup Global Markets, Inc., 2012 WL 851807 (2d Cir. Mar. 15, 2012), the United States Court of Appeals for the Second Circuit essentially approved the terms of a settlement between the Securities and Exchange Commission (the “SEC”) and Citigroup Global Markets, Inc. (“Citigroup”) that had been notoriously rejected by the United States District Court for the Southern District of New York (Rakoff, J.) as “neither reasonable, nor fair, nor adequate, nor in the public interest.” Among other things, the district court had found that a crucial factor missing from the parties’ consent judgment was the lack of admission by Citigroup of any liability. This case stands out because, despite that Citigroup was one of the chief actors behind the financial crisis that began in 2008, its primary regulator is under no legal obligation to insist upon an admission of fault or wrongdoing by Citigroup as part of a settlement of all government claims against the bank.

After an extensive investigation into Citigroup’s marketing of collateralized debt obligations (“CDOs”), the SEC filed a complaint charging Citigroup with negligent misrepresentation under 15 U.S.C. §§ 77q(a)(2) and (3). Simultaneously, the SEC and Citigroup presented a proposed consent judgment, pursuant to which Citigroup agreed to (1) pay $285 million into a fund for investors in a pool of CDOs marketed by Citigroup, (2) entry of an order enjoining it from violating the Securities Act of 1933 and (3) establish procedures to prevent future violations and make periodic compliance demonstrations to the SEC.

The district court rejected the settlement for three reasons. First, it reproved the SEC’s “long-standing” policy of entering into consent judgments without requiring the defendant to admit or deny the underlying allegations, because a settlement “without any admissions [of liability] serves various narrow interests of the parties, but not the public interest.” Second, it held that the settlement was unfair because it unreasonably “impose[d] substantial relief [on Citigroup] on the basis of mere allegations.” Third, it held that the settlement disserved public interest because “without admission of liability, a consent judgment involving only modest penalties gives no indication of where the real truth lies.”

The SEC appealed and moved for a stay of the proceedings in the district court pending its appeal. Citigroup joined with the SEC in all of its arguments.

The Second Circuit considered and rejected each of the district court’s reasons for refusing to approve the consent judgment. The district court found that the settlement offended public interest because Citigroup’s penalty was merely “pocket change,” and the SEC got nothing but a “quick headline.” The Second Circuit held that this determination was flawed because it assumed Citigroup’s liability and gave no deference to the SEC’s wholly discretionary policy choice of whether to settle with Citigroup or pursue it through litigation. The Court indicated it had no reason to doubt that the SEC had taken the public interest in to account because the settlement called for payment by Citigroup of $285 million, “which would be available for compensation of investors who lost money.”

The Court rejected the district court’s characterization of the settlement as “unfair” to Citigroup, noting that contradicted the district court’s concurrent assessment of the settlement amount as “pocket change” and a “mild and modest cost of doing business” for Citigroup. Furthermore, the Court noted that a district court’s legitimate concern does not include protection of “a private, sophisticated, counseled litigant from a settlement to which it freely consents.”

Finally, the Court rejected the district court’s determination that it had no basis to assess the underlying facts absent an admission of liability by Citigroup, referring to the “substantial evidentiary record,” and the SEC’s provision of information regarding how the evidence supported the proposed consent judgment.

The Court held that the movants demonstrated a strong likelihood of success in overturning the district court’s ruling. Considering the remaining prongs of the test, the Court observed that the parties would suffer irreparable harm without a stay, reasoning that the district court’s requirement of an admission from Citigroup essentially precluded any possibility of settlement, leaving the parties no option but to incur substantial costs of litigating their dispute. Lastly, the Court explained that the SEC’s assertion that “its settlement is in the public interest and that its access to a stay so as to protect the settlement is also in the public interest” should not be questioned or rejected by a court “without substantial reason for doing so,” and went on to find no such reason.

Citigroup demonstrates the Second Circuit’s unwillingness to intrude upon the realm of executive agencies. The decision clearly admonished the district court, and warned against interference with or dictating the terms of the arrangements made between public regulatory agencies and the business entities they regulate, even when such entities are the focus of intense public scrutiny about its business practices.

For further information, please contact John Stigi at (310) 228-3717 or Sarah Aberg at (212) 634-3091.

(Reuters) – Citigroup Inc and its Chief Executive Vikram Pandit on Friday won a dismissal of New York real estate developer Sheldon Solow’s lawsuit accusing them of securities fraud for hiding the bank’s risks during the 2008 financial crisis. U.S. District Judge Robert Sweet in Manhattan said Solow failed to show that the defendants had materially misled him about Citigroup’s liquidity and capitalization, or that his stock losses were caused when the bank’s risks were realized. Sweet had in November dismissed an earlier version of Solow’s complaint, but gave the plaintiff a chance to replead. …

USA Today published an article yesterday reporting that Citigroup has been forced to pay at least $85 million to investors in its disastrous MAT/ASTA municipal arbitrage hedge funds. “Investor hedge fund claims costs Citigroup $85M and counting,” by Kevin McCoy, USA Today). That amount does not include payments made by Citigroup to at least 39 other MAT/ASTA investors pursuant to confidential settlements, and Citigroup may well be forced to pay another $50 million or more as dozens more arbitrations go to hearings in 2012 and 2013, according to the article.

The article notes that the Securities and Exchange Commission has been investigating Citigroup’s management and marketing of MAT/ASTA funds for almost 4 years. Former investors told USA Today that Citigroup financial advisors told them the funds would generate returns of 6% to 8%. “I certainly wasn’t going to risk losing capital for a 6% to 8% return,” said one investor who lost $700,000.

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