On Wednesday, November 7, 2011 Judge Rakoff will hold a hearing on the proposed settlement in SEC v. Citigroup Global Markets Inc., 11 Civ. 07387 (S.D.N.Y.). This is the Commission’s latest, significant market crisis case (here). In anticipation of the hearing, and in response to a series of questions about the settlement posed by the Court (here), the Commission filed a brief. Overall it emphasizes the limited role of the court in reviewing a proposed consent decree, the complexity of the investigation and the arms length negotiations which yielded the settlement. It also addresses each of Judge Rakoff’s questions. Those responses note in part:

  • Without admitting or denying: The court inquired about the use of a consent decree entered on this basis. The Commission noted that it has “long utilized consent decrees in which defendants admit no wrongdoing.” This process is similar to that used by the DOJ in civil settlements. It goes beyond that of many agencies, however, since settling defendants cannot deny the allegations in the complaint.
  • Transparency: The Court asked if there is an overriding public interest in determining the predicate for the SEC’s allegations since its mandate is to ensure transparency in the markets and there is no parallel criminal case. In response the SEC noted that the goals of transparency are served here by the filing of the complaint and the on-going litigation with Brian Stoker, the only Citigroup employee charged by the SEC.
  • Amount of the loss: The SEC estimated that investors suffered a loss of more than $700 million in the underlying transaction. That amount, however, is not the measure of the remedies here, particularly since investor losses are not necessarily the same as those caused by the wrongful conduct.
  • The amount of the penalty: The Commission stated that a monetary penalty can be imposed in an amount of $650,000 per violation or up to the gross amount of the pecuniary gain to the defendant from the violation. In essence, the amount of the penalty is roughly equal to the amount of the disgorgement and the prejudgment interest the Commission’s brief notes. In this case that means that a reasonable calculation of the maximum penalty available was $190 million. The brief goes on to note that “As in any case, the penalty actually sought by the SEC reflects the consideration of deterrent impact and a variety of other factors . . . “ The penalty in SEC v. Goldman Sachs is not comparable because it was based on scienter fraud charges, not negligence as here.
  • Factors relevant to assessing a penalty: In discussing its release detailing factors to be considered in assessing a corporate penalty, the Commission noted that the shareholders here received the benefit of the transaction but the settlement contemplates that a Fair fund will be established. The brief also states that the underlying investigation did not uncover evidence to support a “conclusion that there was widespread illicit conduct by individuals throughout Citigroup . . .” and the “evidence did not clearly establish an intent to defraud.” The Commission admitted however, that Citigroup is a recidivist and did not offer “an extraordinary level of cooperation.”
  • Negligence based charges: The charges are negligence based because Citigroup identified qualifying language in the disclosures: “Citigroup had identified certain disclosures made to Class V investors regarding short positions that ‘may’ be taken by Citigroup as well as arguments that could be raised regarding the meaning of the term ‘select’” regarding the selection of the collateral. The brief also notes that the role of counsel can impact whether the charges are negligence or scienter based.

In sum, the brief provides clipped responses to the Court’s questions wrapped in repeated statements regarding the limited role of the Court in the settlement approval process. Whether this approach will fare better here than it did in the Bank of America settlement process is the subject of the hearing later this week. One point is clear however: The Commission has yet to explain the mismatch it created here – and in other cases — between the detailed factual allegations of its complaint which sound in fraud and the negligence based charges and settlement.

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