Monday, August 20, 2012

Law Professors File Brief Supporting District Judge in SEC Citigroup Enforcement Action


A group of  prominent law professors filed an amicus brief in the SEC enforcement action against Citigroup Global Markets, Inc. arguing that the district court acted well within its discretion when it refused to approve the proposed consent judgment because it did not have adequate information to determine whether, after giving deference to the SEC, the proposed consent judgment was fair, reasonable, adequate, and in the public interest. Amici said that the SEC’s practice of settling enforcement actions alleging serious fraud without any acknowledgement of facts in exchange for modest sanctions, which this case exemplifies, does not further the public interest in ascertaining the truth or deterring future securities law violations. A Second Circuit affirmance of the district court’s order will not seriously constrain the SEC’s enforcement efforts, contended the law professors, because the Commission has available a number of alternative strategies. The brief was signed by Professor Barbara Black of the University of Cincinnati and co-signed by, among others, Professors John Coffee of Columbia University, James Cox of Duke University, Jill Fisch of the University of Pennsylvania, and Tamar Frankel of Boston University. (SEC v. Citigroup Global Markets, Inc., 11-5227-CV, CA-2)

In March of this year, a Second Circuit panel stayed the district court proceedings after concluding that the SEC and Citigroup have a strong likelihood of success in their appeal of and effort to overturn the district court’s ruling.

Faced with the stark contrast between the serious allegations and the modest relief requested, contended amici, the district judge acted appropriately in seeking factual information in an effort to understand this discrepancy. The court did not exceed its discretion in refusing to approve a settlement where there was such a disparity between the bare allegations and the proposed relief and where the factual information was deficient. The trial judge correctly identified the potential for harm if a court approves a consent judgment without information to exercise its own independent judgment, said amici, in that the court would become a rubber stamp for the agency.

Without information the court cannot determine if the requested injunction is a proper remedial measure. The injunction may be devoid of content and power in some cases, noted the law professors, while in other cases the requested relief may be an abuse of the agency’s power.

As self-described scholars of the SEC and securities enforcement, amici are concerned with a number of the SEC’s practices in its settlement of securities fraud cases by means of consent judgments. The facts in the instant case illustrate a common practice, they noted, in that the SEC filed a complaint alleging serious securities fraud while simultaneously filing a proposed consent judgment with modest financial penalties, a pro forma ``obey the law’’ injunction, an undertaking to implement inexpensive remedial measures that appear to be window dressing and no acknowledged facts. Both parties get what they want, noted the law professors, the SEC has an opportunity to promote its success and Citigroup can put the matter behind it and treat the settlement as a cost of doing business. In amici’s view, the prevalence of this practice invites cynicism. The matter is swept under the carpet, said the brief, and the public is left to wonder what actually happened.

It also concerns amici that the SEC measures success to a large extent by the number of actions brought. According to the brief, the SEC’s emphasis on numbers reinforces the concern that the agency has incentives to settle on terms that may not be consistent with the public interest. In particular, amici doubted whether quick and easy settlements are likely to promote deterrence.

Finally, the brief said that federal district courts should not be precluded from asking the SEC tough questions since judicial review can lead to beneficial changes in SEC practices. For example, in SEC v. Vitesse Semiconductor Corp. (SD NY 2011), a federal judge pointed out the contradiction of allowing defendants in an SEC enforcement action to settle the charges without admitting or denying the allegations after they had previously pleaded guilty in parallel criminal proceedings. Subsequently, the Division of Enforcement made a policy change to eliminate the neither admit nor deny language where defendants have already admitted to or been criminally convicted of conduct that formed the basis of the SEC enforcement action. If judicial discretion to critically review consent judgments is curtailed, concluded the law professors, an important impetus to encourage the agency to review and revise its policies would be eliminated.

1 comment:

margaret bancroft said...

john Wing, at the request of Judge Rakoff, has submitted a very effective brief You can find it and print it by googling securities law 360 and rakoff