The battle lines have been drawn over the proposed settlement in the SEC’s action against Citigroup Global Markets, Inc. SEC v. Citigroup Global Markets, Inc., Civil Action No. 1:11-cv-07387 (S.D.N.Y.)(here). Judge Rakoff entered an order posing a series of questions to the parties (here). The SEC has filed a brief essentially arguing for deference to its prosecutorial discretion (here). That filing was followed by a memorandum from Citigroup. A new wrinkle is the request by Better Markets, Inc., a nonprofit, to intervene and object to the settlement.

Citigroup’s memorandum argues four key points in support of the settlement. First, for many of the questions posed by the Court the firm defers to the SEC. Thus for questions about whether the settlement should be based on “not admitting or denying,” if there is an overriding public interest in determining if the allegations in the complaint are true and other similar matters, Citigroup “defers to the SEC with respect to its enforcement policies and practices, and agency decisions . . .” At the same time the firm notes, in a fashion which echoes the SEC’s memorandum, that the court has a limited role and should give substantial deference to the Commission.

Second, Citigroup exercised its business judgment in deciding to accept the settlement. For every litigant there are significant concerns involved in litigating with the SEC. Those are magnified for financial institutions. The impact of litigating with the Commission is well illustrated by the Goldman Sachs case. There Goldman chose not to immediately settle. When the complaint was filed its stock dropped over 10% in the first thirty minutes of trading following the announcement of the filing. Subsequently, the price of Goldman shares fell about 24% in the period prior to settlement with the Commission.

Third, the remedies in the proposed settlement are more than adequate in view of the allegations in the complaint. In this regard “the Complaint alleges that CGMI [Citigroup] negligently failed to provide adequate disclosures to a small number of ultra-sophisticated, institutional investors that purchased Class V securities. . .The Complaint does not allege that shareholders of Citigroup were harmed. . . “ The amounts to be paid by Citigroup, coupled with the procedures which must be put in place, are more than sufficient to guard against any repetition. This is particularly true in view of the fact that a new management team is in charge at Citigroup.

Finally, the proposed settlement is a win-win for everyone: “We respectfully submit that the proposed settlement advances the interest of both the alleged victims of CGMI’s misconduct – through disgorgement of the alleged profits (plus interest), the imposition of a penalty, and the distribution of those funds to the Class V investors through establishment of a fair fund – and Citigroup’s shareholders. . . . the Company’s management elected to resolve this matter through settlement . . .precisely to avoid the potential harm that flows from litigation, including the potential loss of shareholder value . .. “

In contrast Better Markets objects to the settlement. The firm describes itself as “a non-profit organization that promotes the public interest in the financial markets. Better markets advocates for greater transparency, accountability, and oversight. . . “ In moving to intervene Better Markets briefly sketches three key objections to the settlement: 1) It fails to hold employees or senior executives accountable; 2) it imposes sanctions that are “woefully inadequate in relation to the egregious nature of the fraudulent conduct . . .” and 3) “the proposed Settlement will signal an unacceptable tolerance for fraudulent conduct in the securities markets and it will confirm that sanctions imposed in SEC enforcement actions are so minimal that they may safely be regarded as a cost of doing business – and a small cost at that.” The memorandum attaches news articles critical of the proposed settlement including one from Bloomberg citing the fact that Citigroup has settled on similar terms with the SEC in the past. The SEC objects to the proposed intervention.

The hearing before Judge Rakoff is scheduled for Wednesday afternoon, November 9, 2011 at 3:00 p.m.

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