In S.E.C. v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011), Judge Rakoff declined to approve the consent decree entered into between Citigroup Global Markets, Inc. (Citigroup) and the United States Securities and Exchange Commission (the SEC). On June 4, 2014, the Second Circuit Court of Appeals vacated Judge Rakoff's order, finding that the district court applied the incorrect legal standard in its review.

In October 2011, the SEC filed a complaint against Citigroup alleging that Citigroup negligently misrepresented its role and economic benefit in structuring and marketing a billion-dollar fund known as the Class V Funding III (the Fund). The complaint alleged, among other things, that Citigroup "exercised significant influence" over the selection of over $500 million worth of the Fund's assets. According to the SEC, Citigroup told Fund investors that the Fund's investment portfolio was chosen by an independent investment advisor but, in fact, Citigroup itself selected a substantial amount of assets in which Citigroup had taken a short position. The SEC alleged that, by doing so, Citigroup realized a profit of approximately $160 million while Fund investors suffered millions in losses.

Shortly after the complaint was filed, the SEC proposed a consent judgment in which Citigroup agreed to: (i) a permanent injunction barring it from violating Sections 17(a)(2) and (3) of the Securities Exchange Act; (ii) disgorgement of $160 million; (iii) prejudgment interest of $30 million; and (iv) a civil penalty of $95 million. Pursuant to the consent judgment, Citigroup also agreed not to seek an offset of any compensatory damages awarded in any related investor action. The consent decree did not contain any admission of guilt or liability.

After hearing in the matter, the district court declined to approve the consent judgment. Specifically, the district court found that:

Before a court may employ its injunctive and contempt powers in support of an administrative settlement, it is required, even after giving substantial deference to the views of the administrative agency, to be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.¹

The district court further found that the proposed consent decree was "neither fair, nor reasonable, nor adequate, nor in the public interest . . . because it [did] not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards."²

Both the SEC and Citigroup filed immediate notices of appeal and moved in the district court for an emergency stay pending the outcome of the appeal. In addition, the SEC sought an emergency stay in the Second Circuit. In the alternative, the SEC filed a petition for a writ of mandamus to set the district court's order aside. Prior to the Second Circuit's ruling on the motion to stay, the district court issued an order denying the SEC's motion to stay, reasoning that the Second Circuit lacked jurisdiction to hear an interlocutory appeal from the denial of approval of a consent judgment.³

The Second Circuit disagreed, concluding that the SEC demonstrated a strong likelihood of success on the merits because the district court did not accord the SEC's judgment adequate deference.⁴ Because both Citigroup and the SEC sought approval of the consent order, the Second Circuit appointed counsel to advocate on behalf of the district court's order.⁵

As an initial matter, the Second Circuit determined that it had jurisdiction to hear the interlocutory appeal pursuant to 28 U.S.C. § 1292(a)(1).⁶ The Court then turned to the "far thornier question of what deference the district court owes an agency seeking a consent decree."⁷ The district court found that it was "required, even after giving substantial deference to the views of [the SEC], to be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest."⁸ Other district courts, however, "view the role of the Court in reviewing and approving proposed consent judgments in S.E.C. enforcement actions [as] restricted to assessing whether the settlement is fair, reasonable and adequate within the limitations Congress has imposed on the S.E.C. to recover investor losses."⁹

The Second Circuit noted that the "fair, reasonable, adequate and in the public interest" standard applied by the district court "finds its origins in a variety of cases."¹⁰ The Second Circuit then clarified that the proper standard for reviewing a proposed consent decree "involving an enforcement agency requires that the district court determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the public interest would not be disserved in the event that the consent decree includes injunctive relief."¹¹ Moreover, "[a]bsent a substantial basis in the record for concluding that the proposed consent decree does not meet these requirements, the district court is required to enter the order."¹²

The "adequacy" requirement is omitted from the standard because, although reviewing a proposed settlement for adequacy makes "perfect sense" in the class action context, in which the settlement typically contains a waiver of all future claims, a consent decree proposed by the SEC does not pose the same concerns since potential plaintiffs with a private right of action are free to sue on their own behalf.¹³

Thus, at a minimum, a court reviewing a proposed consent decree for fairness and reasonableness should assess "(1) the basic legality of the decree . . .; (2) whether the terms of the decree, including its enforcement mechanism, are clear. . .; (3) whether the consent decree reflects a resolution of the actual claims in the complaint; and; (4) whether the consent decree is tainted by improper collusion of some kind."¹⁴ The "primary focus of the inquiry, however, should be on ensuring the consent decree is procedurally proper, using objective measures similar to the factors set out above, taking care not to infringe on the S.E.C.'s discretionary authority to settle on a particular set of terms."¹⁵

Against that framework, the Second Circuit held that it was an abuse of discretion for the district court to require that the SEC establish the "truth" of the allegations as a condition for approval of the decree.¹⁶

In addition, when a proposed consent decree contains injunctive relief, a district court must also consider the public interest.¹⁷ Here, the district court "correctly recognized that it was required to consider the public interest in deciding whether to grant the injunctive relief in the proposed injunction. However, the district court made no findings that the injunctive relief proposed in the consent decree would disserve the public interest . . . . [and] the district court's failure to make the proper inquiry constitutes legal error."¹⁸ On remand, the Second Circuit instructed the district court to consider whether the public interest would be disserved by the entry of the consent decree.¹⁹

Further, the Second Circuit found that, to the extent the district court failed to approve the consent decree because it believed the SEC failed to bring the proper charges against Citigroup (negligence as opposed to fraud), it further abused its discretion.²⁰

Accordingly, the Second Circuit vacated the district court's order and remanded the case for further proceedings in accordance with its opinion.²¹

Update:

On Tuesday, August 5, 2014, Judge Rakoff filed an Opinion and Order approving the consent decree entered into between Citigroup and the SEC, following the mandate by the Second Circuit Court of Appeals, leaving him with "nothing but sour grapes."²² Judge Rakoff began by acknowledging that "[t]hey who must be obeyed have spoken" and that it was the District Court's duty to "faithfully fulfill their mandate."²³ Judge Rakoff then indicated that he "cannot say that the proposed Consent Judgment is procedurally improper or in any material respect fails to comport with the very modest standard imposed by the Court of Appeals."²⁴Nonetheless, Judge Rakoff expressed his fear that, "as a result of the Court of Appeal's decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary's contempt powers will in practice be subject to no meaningful oversight whatsoever."²⁵

_{1 827 F. Supp. 2d at 332.} 

_2 Id. 

_{3 S.E.C. v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 336, 338–39 (S.D.N.Y. 2011) ("Citigroup I").} 

_{4 S.E.C. v. Citigroup Global Markets, Inc., 673 F.3d 158, 163–65 (2d Cir. 2012).} 

_{5 Id. at 169.} 

_{6 S.E.C. v. Citigroup Global Markets, Inc., Nos. 11-5227-cv (L); 11-5375-cv(con); 11-5242-cv(xap) at 12-16 (2d Cir. June 4, 2014) ("Citigroup IV").} 

_{7 Id. at 17.} 

_{8 Citigroup I, 827 F. Supp. 2d at 332.} 

_{9 Citigroup IV, at 18 (internal citations omitted).} 

_{10 Id. (citing cases). 
11 Id. at 19 (internal citations omitted).}

_12 Id. 

_{13 Id. at 19–20.} 

_{14 Id. at 20.} 

_{15 Id. at 21.} 

_16 Id. 

_{17 Id. at 23.} 

_{18 Id. at 25.} 

_{19 Id. at 25–26.} 

_{20 Id. at 26.} 

_{21 Id. at 28.} 

_{22 See Document No. 59, SEC v. Citigroup Global Markets, Inc., No. 11-cv-7387, (Aug. 5, 2014), at 3.} 

_{23 Id. at 1.} 

_{24 Id. at 2.} 

_{25 Id. at 3.}