United States Sec. & Exch. Comm'n v. Citigroup Global Mkts. Inc.

• Decision Date: 15 March 2012
• Docket Number: Docket Nos. 11–5227–cv (Lead),11–5242–cv (XAP).,11–5375–cv (Con)
• Citation: 673 F.3d 158
• Parties: UNITED STATES SECURITIES & EXCHANGE COMMISSION, Plaintiff–Appellant–Cross–Appellee, v. CITIGROUP GLOBAL MARKETS INC., Defendant–Appellee–Cross–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

673 F.3d 158

UNITED STATES SECURITIES & EXCHANGE COMMISSION, Plaintiff–Appellant–Cross–Appellee,

v.CITIGROUP GLOBAL MARKETS INC., Defendant–Appellee–Cross–Appellant.

Docket Nos. 11–5227–cv (Lead)

11–5375–cv (Con)

11–5242–cv (XAP).

United States Court of Appeals, Second Circuit.

Submitted: Jan. 17, 2012.Decided: March 15, 2012.

(Jeffrey A. Berger, Michael A. Conley, Jacob H. Stillman, Mark Pennington, U.S. Securities and Exchange Commission, Washington, D.C., on the brief), for Appellee–Cross–Appellant.

(Brad S. Karp, Theodore V. Wells, Jr., Mark F. Pomerantz, Walter Rieman, Susanna M. Buergel, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, on the brief), for Appellant–Cross–Appellee.

Before: WALKER, LEVAL, POOLER, Circuit Judges.

PER CURIAM:

Pending before us is a motion, pursuant to Federal Rule of Appellate Procedure 8(a), to stay district court proceedings in a litigation the Plaintiff–Appellant–Petitioner, the United States Securities and Exchange Commission (“S.E.C.”), brought against Citigroup Global Markets Inc. (“Citigroup”). The district court, by order of November 28, 2011, refused to approve the settlement between the S.E.C. and Citigroup and ordered them to a prompt trial. The S.E.C., as plaintiff, and Citigroup, as defendant, each bring interlocutory appeal from that order. The S.E.C. alternatively petitions for a writ of mandamus to set the order aside. Citigroup joins with the S.E.C. in all of its arguments.

The challenge by both parties to the district court's order raises important questions. These include the division of responsibilities as between the executive and the judicial branches and the deference a federal court must give to policy decisions of an executive administrative agency as to whether its actions serve the public interest (and as to the agency's expenditure of its resources). They include also the question of a court's authority to reject a private party's decision to compromise its case on the ground that the court is not persuaded that the party has incurred any liability by its conduct. As we are satisfied the criteria for a stay are met, it is hereby ORDERED that the motion for a stay is GRANTED and the motion to expedite the appeal is DENIED.

We recognize that, because both parties to the litigation are united in seeking the stay and opposing the district court's order, this panel has not had the benefit of adversarial briefing. In order to ensure that the panel which determines the merits receives briefing on both sides, counsel will be appointed to argue in support of the district court's position.

The merits panel is, of course, free to resolve all issues without preclusive effect from this ruling. In addition to the fact that our ruling is made without benefit of briefing in support of the district court's position, our ruling, to the extent it addresses the merits, finds only that the movant has shown a likelihood of success and does not address the ultimate question to be resolved by the merits panel—whether the district court's order should in fact be overturned.

Background

We begin by summarizing the proceedings, the proposed settlement, and the district court's order. As part of an industry-wide investigation into certain abuses that contributed to the recent financial crisis, the S.E.C. undertook an investigation of Citigroup's marketing of collateralized debt obligations (“CDOs”). After several years of investigation, discovery, and discussions with Citigroup, the S.E.C. filed a complaint charging Citigroup with negligent misrepresentation under 15 U.S.C. § 77q(a)(2) and (3). Simultaneously with the filing of the complaint, the S.E.C. and Citigroup presented a proposed consent judgment to the district court for its approval. The settlement provided in essence the following: Citigroup agreed (1) to pay $285 million into a fund, which the S.E.C. may distribute to investors in a pool of CDOs marketed by Citigroup in compensation of their losses, (2) to the entry of an order enjoining it from violating certain sections of the Securities Act of 1933, and (3) to undertake to establish procedures to prevent future violations and to make periodic demonstrations of compliance to the S.E.C.

The district court rejected the settlement, concluding that it was “neither reasonable, nor fair, nor adequate, nor in the public interest,” primarily because it included no admission by Citigroup of liability. U.S. Secs. and Exch. Comm'n v. Citigroup Global Mkts. Inc., No. 11 Civ. 7387, 827 F.Supp.2d 328, 335, 2011 WL 5903733, at *6 (S.D.N.Y. Nov. 28, 2011). The court explained three main reasons that justified its conclusion:

First, the court expressed strong disapproval of what it called “the S.E.C.'s long-standing policy—hallowed by history but not by reason—of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations.” Id. at 332, 2011 WL 5903733, at *4. Without the defendant's admission, such a judgment would have “no collateral estoppel effect” in another litigation brought against the defendant by victims of its alleged wrongdoing. Id. “[It] ... leaves the defrauded investors substantially short-changed ... [as they] cannot derive any collateral estoppel assistance from Citigroup's non-admission/non-denial of the S.E.C.'s allegations.” Id. at 334, 2011 WL 5903733, at *5. The court found it “hard [ ] to discern ... what the S.E.C. is getting from this settlement other than a quick headline.” Id. Because it “does not involve any admissions and ... results in only very modest penalties [described by the court as “pocket change to an entity as large as Citigroup,” id.], [such a consent judgment] is just as frequently viewed, particularly in the business community, as a cost of doing business.” Id. The court also found that the settlement “without any admissions [of liability by Citigroup] serves various narrow interests of the parties,” but not the public interest. Id. (emphasis omitted).

The second reason given by the court for rejecting the consent judgment was its perceived unfairness to the defendant, Citigroup.

[The settlement] is not reasonable, because how can it ever be reasonable to impose substantial relief [on Citigroup] on the basis of mere allegations? It is not fair, because, despite Citigroup's nominal consent, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged is patent.

Id. at 335, 2011 WL 5903733, at *6.

The court's third reason for concluding that the consent judgment was not in the public interest was that, without admission of liability, a consent judgment involving only modest penalties gives no “indication of where the real truth lies.” Id. at 333, 2011 WL 5903733, at *5.

[The settlement] is not adequate, because, in the absence of any facts, the Court lacks a framework for determining adequacy. And, most obviously, the proposed Consent Judgment does not serve the public interest, because it asks the Court to employ its power and assert its authority when it does not know the facts.

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts—cold, hard, solid facts, established either by admissions or by trials—it serves no lawful or moral purpose and is simply an engine of oppression.

Id. at 335, 2011 WL 5903733, at *6.

The issue pending before us is whether to grant S.E.C.'s motion for a stay of district court proceedings pending this court's disposition of the appeals and mandamus petition.

Discussion

Preliminarily, we note that, while it is unclear whether interlocutory appeal lies from an order refusing to approve a proposed consent judgment, see, e.g., State of New York v. Dairylea Coop., Inc., 698 F.2d 567, 570 (2d Cir.1983), there is no question that our court has jurisdiction to rule on the issues raised by the petition for mandamus, even if we determine that interlocutory appeal does not lie in these circumstances. We recognize that the standard for grant of mandamus is more onerous than the standard for reversal on appeal. See Secs. and Exch. Comm'n v. Rajaratnam, 622 F.3d 159, 169 (2d Cir.2010). Nevertheless, we need not resolve whether we have jurisdiction to review the district court's order on interlocutory appeal because we conclude that the parties have made the required showing of likelihood of success regardless of the applicable standard of review.

In determining whether to issue a stay, the governing precedents direct that we consider the following factors: “(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies.” Hilton v. Braunskill, 481 U.S. 770, 776, 107 S.Ct. 2113, 95 L.Ed.2d 724 (1987); accord In re World Trade Ctr. Disaster Site Litig., 503 F.3d 167, 170 (2d Cir.2007); United States v. E. Air Lines, Inc., 923 F.2d 241, 243–44 (2d Cir.1991).

A. Likelihood of Success

We first turn to whether the S.E.C. and Citigroup have a strong likelihood of success on the merits in their effort to overturn the court's ruling. We examine each of the three prongs of the court's justifications in turn.

1. Failure of the settlement to serve the public interest.

The court's first and most important justification for its ruling was that a consent judgment without Citigroup's admission of liability is bad policy and fails to serve the public interest because defrauded investors cannot use the judgment to establish Citigroup's liability in civil suits to recover the investors' losses. In that reasoning, we...