The SEC and Judge Rakoff are squaring off in what can only be viewed as a very high stakes game of poker. At the center of the battle is the question of whether Judge Rakoff acted within his discretion in refusing to enter the settlement the Commission negotiated with Citigroup Global Markets, Inc., to resolve a key market crisis case. SEC v. Citigroup Global markets Inc., Case No. 11 Civ 7387 (S.D.N.Y.)(discussed here).

The next round in this drama will play out before a motion panel in the Second Circuit and perhaps before the Appeals Court on the merits. Presently, a hearing is set before a motion panel on January 17, 2012. Whether the appeals court will actually consider the merits of the appeal is an open question. After refusing to enter the settlement Judge Rakoff set the SEC’s case for trial with the companion action against Brian Stoker. The SEC however requested a stay of that order. .

The district court’s order denying the SEC’s request for a stay provides insight into the key issues in this battle. Following the rejection of the settlement, the SEC chose on December 15, 2011 to appeal the decision rather than consider other options as it had in the past. This approach is consistent with the briefs the Commission filed before Judge Rakoff requesting that the settlement be entered. Despite an order from the Court requesting in part a factual basis for the settlement and an explanation for the facial mismatch between the allegations of intentional wrong doing and the negligence based charges and settlement, the Commission chose, in essence, not to respond. Rather, the agency argued that it was entitled to deference and the settlement should be entered. Stated differently, the Commission told the Court to enter the settlement without explanation – period.

In an unsurprising ruling, Judge Rakoff denied the SEC’s request for a stay of his order, following the filing of the appeal. In its order denying the stay, the Court began by noting that the “actual Notices of Appeal filed by the SEC and Citigroup . .. do not recite any statutory basis for the appeals.” Although the Commission claimed that the notice of appeal divested the district court of jurisdiction, it offered little authority for this claim other than a statement that the decision should be reviewable as an interlocutory order under 28 U.S.C. § 1292(a)(1), according to the order.

Judge Rakoff, however, concluded that the cited Section does not offer any basis for the SEC’s claim. That Section provides for an interlocutory appeal from a consent judgment when the requested “injunctive relief is so central to the rejected settlement that the appellant will suffer immediate and irreparable harm from the denial, not of the settlement generally, but of the injunctive relief specifically.” This is not the case here, according to the order. Indeed, the SEC apparently admitted this by claiming that the central legal error on appeal is the question of whether the agency had to provide the Court with “proven or acknowledged facts in order to evaluate whether the proposed Consent Judgment, in any of its aspects, is fair, reasonable, adequate, and in the public interest. SEC Mem. at 11.” Viewed in this context, it becomes clear, according to the order, that the denial of injunctive relief is not the key question and the SEC’s appeal must fail.

Furthermore, the Court concluded that any possible harm to the SEC is “illusory.” The order setting the case for trial simply requires the SEC to conduct trial preparation. Since it is doing that in the companion case which is essentially the same, there is little if any harm requiring a stay. While Judge Rakoff allowed that Citigroup may have some claim here, the question could not be resolved, according to the order, without evaluating the insurance coverage available for the claim.

Not to be outdone, the SEC apparently has threatened to file a writ of Mandamus if its appeal is not successful. While this is not a question to be resolved by the district court, Judge Rakoff noted that the “standards for mandamus are even more onerous than those under § 1291(a)(1).” Accordingly, Judge Rakoff concluded that “it seems patently clear that the parties have no basis for an appeal . .. “

If the motion panel later this month focuses solely on jurisdictional issues and the stay it is possible that the merits of the appeal may not be considered in this round. If Judge Rakoff is correct and his ruling cannot be appealed now or no stay is warranted, the central question the SEC seeks to appeal may never be heard by the appeals court. In that event the Commission will have to decide what to do with its settlement – offer the Court the requested proof or wait and see if it can produce the proof to a jury. If Judge Rakoff is incorrect the Second Circuit may reach the issues later this year. If it sustains the Commission’s position presumably its settlement will be entered. If not the ruling could severely damage the Enforcement program. Clearly the SEC needs to win every issue at ever stage to secure the relief it seeks. No doubt the stakes are very high here for the SEC. In the end, win or lose, it seems dubious at best that the viability of the enforcement program should hinge on a high stakes wager that could have been resolved in other ways.

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