by T. GormanPosted on Posted in SECActions

Judge Rakoff, in a December 27, 2011 order, denied the Commission’s request for a stay of his order directing SEC v. Citigroup Global Markets, Inc., Case No. 11 Civ 7387 (S.D.N.Y.) to trial. That order, which followed the refusal of the District Court to enter a proposed settlement agreed to by the SEC and Citigroup, set up a high stakes gamble for the SEC in the Circuit Court as discussed here.

The SEC raised the stakes. The agency filed a Petition for a Writ of Mandamus and a Supplemental Memorandum in Support Of Its Unopposed Motion To Stay The Proceedings Below And To Expedite The Appeal in the Second Circuit Court of Appeals.

The Petition for a Writ is essentially a back up to the interlocutory appeal under Section 1292(a)(1). In its petition the Commission argues that under Section 1292(a)(1) its appeal is entirely proper. If however it is not, the SEC claims it has a “clear and indisputable right” (quoting SEC v. Rajaratnam, 622 F. 3d 159 (2nd Cir. 2010)) to a writ because the “district court clearly erred.” These conclusions are directly contrary to the findings of the District Court in its December 27th order.

The Commission’s supplemental memorandum defends both the appeal and the petition for a writ while offering insights into the agency’s views of the dispute. First, its appeal under Section 1291(a)(1) is proper, according to the filing. This is because “the district court’s order rejecting the proposed consent judgment [had] the practical effect of denying an injunction.” Indeed, it was the request for injunctive relief that “animated the district court’s erroneous decision . . . “ to reject a settlement negotiated and agreed to by the parties, according to the Commission. The refusal to enter the settlement will also cause the Commission irreparable harm by forcing it to incur the costs and risks of a trial that “it had sought to avoid . . .” The fact that the parallel case is proceeding to trial does not detract from this point, the Commission argues, because the cases are not identical and the SEC has a finite budget which means shifting resources from one case deprives another.

Second, mandamus is appropriate because absent an interlocutory appeal, the Commission contends that it will not have any alternative remedy. This point is fortified by the fact that the issue here is novel, significant and its resolution will aid the administration of justice.

Finally, the Commission grounds these arguments not just on its right to negotiate a settlement under terms it chooses, but essentially but on the notion that it had no choice but to file an appeal and seek a stay. In rejecting the settlement the District Court essentially demanded an admission along with additional remedial procedures to prevent a repetition of the underlying conduct, according to the filing. The District Court also “did not express any willingness to consider further proposals; it unequivocally directed the parties to prepare for trial .. .”

Whether the Commission’s only choice was to pursue an interlocutory appeal or a writ of mandamus is, at best, unclear. It does not appear that the District Court invited the parties to renegotiate the settlement. At the same time, the Court made its objections to the proposed settlement clear. Equally apparent is the fact that the SEC did not propose alternative settlement terms. Before pursuing its current high stakes approach, prudence would surely dictate that the agency at least make an effort.

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by T. GormanPosted on Posted in SECActions

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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