The appeal of Judge Rakoff’s rejection of the settlement between the SEC and Citigroup is spectacular theater.  Behind the scenes, however, is a highly serious issue: does a federal district judge have the power, as a condition to approving a consent judgment, to require an admission of liability or to otherwise impose collateral estoppel effects.

The briefing is complete.  I commend it to you (if you have a couple of hours to spare); it is excellent and entertaining.  Oral argument has been requested but not scheduled.

Here’s some background.  The SEC investigated Citigroup’s marketing of collateralized debt obligations.  The SEC then filed a complaint alleging non-scienter violations of the Securities Act.  The same day, the SEC also filed a proposed consent judgment, enjoining violations of the law, ordering business reforms, and requiring the company to pay $285 million.  As part of the consent judgment, Citigroup did not admit or deny the complaint’s allegations.  Judge Rakoff held a hearing to determine “whether the proposed judgment is fair, reasonable, adequate, and in the public interest.”  In advance, the court posed nine questions, which the parties answered in detail.  Judge Rakoff rejected the consent judgment.

The rejection order rested, in part, on the court’s determination that any consent judgment that is not supported by “proven or acknowledged facts” would not serve the public interest because:

• the public would not know the “truth in a matter of obvious public importance”, and
• private litigants would not be able to use the consent judgment to pursue claims because it would have “no evidentiary value and no collateral estoppel effect”.

The SEC and Citigroup appealed, and sought an order staying the rejection order pending appeal.  A panel of the Second Circuit granted the motion, finding that the SEC and Citigroup have a strong likelihood of success on appeal, and rejecting the district court’s holding that a consent judgment may be approved only if “liability has been conceded or proved and is embodied in the judgment.”

The parties then filed appeal briefs.  One of the briefs is from pro bono counsel appointed to represent Judge Rakoff.Continue Reading Judge Rakoff’s Rejection of SEC-Citigroup Settlement: Second Circuit to Decide Power of Court to Condition Consent Judgment on Admission of Liability