Tuesday, November 29, 2011

SEC Staff and Senator Grassley React to Federal Court Rejection of Citigroup Settlement

Of a federal court’s (SD NY) rejection of the an SEC-Citigroup settlement of an enforcement action, Senator Charles Grassley (R-Iowa) said that Judge Rakoff was right to ask for information. According to Senator Grassley, Ranking Member on the Judiciary Committee, the SEC needs to provide a clear rationale for the enforcement penalties in this case and in others. Otherwise, the public is in the dark about whether the settlements are adequate and the court’s role is reduced to a rubber stamp. A settle and slap-on-the-wrist approach has not and will not deter the defrauding of investors, emphasized the Senator.

While expressing respect for the court's ruling, SEC Enforcement Director Robert Khuzami emphasized that the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial. The Commission is reviewing the court's ruling, he said, and will take steps that best serve the interests of investors.

According to the SEC official, the court's criticism that the settlement does not require an admission to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial. It also ignores decades of established practice throughout federal agencies and decisions of the federal courts. Refusing an otherwise advantageous settlement solely because of the absence of an admission, continued the Director, would also divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court.

The SEC also believe that the complaint fully and accurately sets forth the facts that support the claims in this case as well as the basis for the proposed settlement. These are not mere allegations, emphasized the Director, but the reasoned conclusions of the federal agency responsible for the enforcement of the securities laws after a thorough and careful investigation of the facts.

Although the court questions the amount of relief obtained, he continued, it overlooks the fact that securities law generally limits the disgorgement amount the SEC can recover to Citigroup's ill-gotten gains, plus a penalty in an amount up to a defendant's gain. It was for this reason that the SEC sought to recover close to $300 million, he noted, adding that all of which we intended to deliver to harmed investors. The SEC does not currently have statutory authority to recover investor losses, he pointed out.

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