On March 15, the Second Circuit stayed proceedings in the now notorious case of SEC v. Citigroup. The case hit headlines last November when District Court Judge Rakoff refused to accept a $280 million settlement agreement between the SEC and Citigroup. Judge Rakoff’s decision was outlined in great detail in a previous post on the Network.
By granting a stay in the proceedings, the Second Circuit is allowing the SEC and Citigroup to avoid having to proceed with the trial litigation while appealing Judge Rakoff’s decision. The appeal is scheduled to be heard in September, though the dicta in the March 15 decision appears to support the position that the Second Circuit is prepared to overturn Judge Rakoff’s decision.
In the per curiam opinion, the court asserted that a “significant problem” with Judge Rakoff’s decision was that it “does not appear to have given deference to the S.E.C.’s judgment on wholly discretionary matters of policy.” The court stated that “it is not, however, the proper function of federal courts to dictate policy to executive administrative agencies.” Quoting the famous Chevron case, which established the standard for review of federal administrative decisions the court noted that “Federal judges-who have no constituency-have a duty to respect legitimate policy choices made by those who do.”
Latham & Watkins had issued a client alert in the wake of Judge Rakoff’s decision, communicating the uncertainty regarding the standard of review for settlement procedures going forward. “Whether courts will scrutinize proposed settlements more closely because of diminished faith in administrative agencies or because they adopt the suggestion that the “right to know the truth” is inherent in the public interest, they may demand more of a factual showing than has been required in the past.”
On Monday WilmerHale published an article speculating that the Second Circuit’s decision “may be a predictor of how the Second Circuit will rule on the merits.” The article also emphasizes the importance of the Second Circuit’s decision in preserving the SEC’s practice of settling cases with clauses where the accused “neither admits nor denies” the crimes it is alleged of committing. Such language is important to defendants because, if they must admit wrongdoing in order to settle a case with the SEC, the company risks litigation from private parties and the directors risk criminal prosecution by the DOJ.
In a separate article the law firm of Fulbright & Jaworski, stated, in noticeably ominous language, that “any company that faces the current or future prospect of an SEC enforcement action should pay close attention to this case” (emphasis added). Check back with the Network over the coming months as we’ll continue to follow developments in this case.