I’ve had some fun these last few days proposing counterintuitive theories for why Citi might not suck as much as you probably think it does and it’s nice to see others joining in the pastime, even if this sounds a little far-fetched:

The district court’s logic appears to overlook the possibilities (i) that Citigroup might well not consent to settle on a basis that requires it to admit liability, (ii) that the S.E.C. might fail to win a judgment at trial, and (iii) that Citigroup perhaps did not mislead investors.

That piece of rank conjecture is from the Second Circuit’s opinion on an appeal* of Judge Rakoff’s rejection of the settlement between the SEC and Citi over some mortgage-backed securities. Here’s DealBook:

A federal appeals court dealt a stinging rebuke on Thursday to Judge Jed S. Rakoff of the Federal District Court in New York, who last year rejected a Securities and Exchange Commission fraud settlement with Citigroup because the deal allowed the company to avoid admitting any wrongdoing.

The Court of Appeals for the Second Circuit in New York, in a mostly procedural decision, ruled that the S.E.C. was likely to succeed in a full-blown appeal of Judge Rakoff’s rejection of the commission’s proposed $285 million settlement with Citigroup. The case centered on the bank’s structuring and sale of mortgage-related investments prior to the financial crisis. …

The appeals court ruling puts off a trial between the S.E.C. and Citigroup that Judge Rakoff had scheduled for July. He did so after concluding that because the settlement failed to include any agreed-upon facts, the court was unable to judge whether the outcome was fair, adequate reasonable or in the public interest.

But the appeals court panel dismantled Judge Rakoff’s logic and analysis, saying he had overstepped his judicial authority in rejecting an settlement by an agency of the executive branch. “We have no reason to doubt the S.E.C.’s representation that the settlement it reached is in the public interest,” the court said.

We talked about Rakoff’s decision in November, and I thought then that it was kind of a stretch. So did the Second Circuit – and, yeah, “dismantled” is right, the opinion is brisk and sharp and pretty unimpressed by Rakoff. As they say:

The district court’s reasoning was that the settlement must be deemed to be either insufficiently onerous or excessively onerous unless the liability of Citigroup had been either proved or disproved at trial or one side or the other had conceded the issue. This is tantamount to ruling that in such circumstances, a court will not approve a settlement that represents a compromise. It is commonplace for settlements to include no binding admission of liability. A settlement is by definition a compromise.

Which, is, true. A settlement is just “I’ll stop suing you in exchange for you doing something, like say giving me $285mm and promising not to do bad things any more, and we won’t ever actually go to court about it.” It would be kind of weird if judges could prevent that compromise just because there wasn’t enough going-to-court to satisfy the judge’s idle curiosity or desire to air Citi’s dirty secrets.

Still, feelings are mixed here, because Judge Rakoff is generally good stuff and giving the SEC a hard time is a noble occupation and somebody has to do it now that that inspector general guy is off to greener pastures. Of course Rakoff was acclaimed as a hero in November for calling out the lawless SEC and imposing the rule of law on them; I suspect the Second Circuit panel will get less praise for calling out the lawless Judge Rakoff and imposing the rule of law on him, though that would probably be more accurate.

Rakoff makes out okay here, though. Sure the appeals court ruling was pretty harsh, but on the plus side, no one will read it. (Plus he gets another shot at the appeals court, with a court-appointed lawyer arguing on his behalf, which, no pressure.) Personally he retains the warm glow of having smacked around the SEC for being pushovers. Professionally, negative attention from him – and others – may push the SEC to be a tiny bit toothier in its enforcement efforts. And, if they know what’s good for them the SEC will take pains to keep future cases out of Rakoff’s court. Which is probably a nice bonus for him too.

S.E.C. Appears Poised to Win Appeal in Citigroup Settlement [DealBook]
SEC v. Citigroup Global Markets


Benchslap of the Day: Second Circuit Rebukes Rakoff [ATL]
Earlier: Surely The SEC Is Sick Of Going To Court By Now?

* All of this is just a bit wrong, legally, but you don’t actually care about, like, mandamus and trial stays, you don’t, I promise.

4 comments (hidden to protect delicate sensibilities)
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Comments (4)

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