Friday, December 30, 2011

Federal District Court that Rejected SEC-Citigroup Settlement Now Orders SEC to Promptly Notify It of Any Filings in Second Circuit Court of Appeals

A federal court that had refused to approve a settlement in an SEC enforcement action against Citigroup declined to grant a request by the parties to stay all proceedings in the case pending determination of an appeal to the Second Circuit Court of Appeals. SEC v. Citigroup Global Markets, Inc., 11 Civ. 7387, Dec. 27, 2012, (memorandum order). Further, in a December 29th order supplementing the memorandum order, the district court ordered the parties to promptly notify it of any filings in the court of appeals by faxing copies of the filings to the district court immediately after they are filed in the court of appeals.

Virtually simultaneously with the district court’s opinion denying the stay, the appeals court granted the SEC’s request for a temporary stay until Jan. 17, 2012 when a Second Circuit motions panel will consider the motion for a stay. According to the district court, the appeals court issued its decision without the benefit of the memorandum order denying the stay in which the district judge concluded that the purported statutory basis for the instant appeal is patently defective, and, given the absence of any obligation to consider a stay on the basis of the SEC's putative intention to seek mandamus, there is no occasion for the court to address the merits of the parties' request for a stay.

According to the district court, the alleged error that the SEC, joined by Citigroup, seeks to correct by their appeal is the court's insistence that it be provided with proven or acknowledged facts in order to evaluate whether the proposed consent judgment, in any of its aspects, is fair, reasonable, adequate, and in the public interest. Thus, said the district judge, the gravamen of the parties’appeal has nothing to do with the denial of injunctive relief per se.

Moreover, the court said that failure to grant the injunctive relief sought in the proposed consent decree does not relate in any material way to the primary irreparable harm that the parties assert they will suffer if the decree is not immediately approved, namely that they will be required to allocate substantial resources to the litigation of this matter. This alleged harm is a product of the rejection of the settlement overall, reasoned the district court, and would not be cured by the granting of the proposed injunctive relief.

Furthermore, the alleged harm is largely illusory because the SEC has filed a parallel action against a Citigroup employee that repeats every allegation that is made in the Citigroup complaint, and more. Given that the employee intends to litigate these charges to the fullest, noted the court, the SEC will have to undertake virtually the same discovery, motion practice, and trial preparation with respect to him as it will have to
undertake with respect to Citigroup.

In the view of the district judge, a more fundamental problem with all these arguments is that if these kinds of harms were sufficient to justify interlocutory appeals the final judgment rule would be rendered a nullity. The court cited a 1994 US Supreme Court ruling involving a refusal by a district court to enforce a settlement agreement. In Digital Equip. Corp. V. Desktop Direct, Inc., 511 U.S. 863 (1994), the Court held that such harms cannot support an interlocutory appeal. The Supreme Court noted that there are innumerable situations, including rejections of settlement agreements, where the effect is to force the parties to go to trial even though they had expressly bargained not to. But if immediate appellate review were available every such time, reasoned the Court, Congress’ final decision rule would end up a pretty puny one.

In its supplemental order, the district court noted that as a reason for proceeding on an emergency basis, the SEC stated that Citigroup had only until January 3, 2012 to answer or move to dismiss the underlying complaint, and that if Citigroup files its answer denying some or all of the allegations, or if Citigroup moves to dismiss, challenging the complaint’s legal sufficiency, it will disrupt a central negotiated provision of the consent judgment pursuant to which the financial institution agreed not to deny the allegations. According to the district judge, this statement would seem to have been materially misleading in at least four respects.

First, a motion to dismiss does not constitute either an admission or denial but is rather a challenge to the face of the complaint. Second, the SEC was either already aware that Citigroup was planning to move to dismiss rather than to answer or could have readily found this out by calling counsel for the bank. Third, nowhere in the underlying papers of the parties to the district court seeking a stay had they argued that January 3 was a critical or even material date. Fourth, in light of the fact that the court’s position was not before the appeals court, the SEC was under a professional obligation to bring to the attention of the appeals court the fact that the US Supreme Court had previously ruled that the denial of the fruits of a settlement does not, without more, provide a basis for interlocutory appeal, let alone a stay, citing the Court’s ruling in Digital Equip. Corp. V. Desktop Direct, Inc.

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