U.S. appeals court voids judge's rejection of SEC-Citigroup accord

Wed Jun 4, 2014 3:12pm EDT
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By Jonathan Stempel and Sarah N. Lynch

NEW YORK/WASHINGTON (Reuters) - A federal appeals court on Wednesday handed the U.S. Securities and Exchange Commission a big victory by voiding a judge's pathbreaking decision to reject the regulator's $285 million fraud settlement with Citigroup Inc (C.N: Quote).

The 2nd U.S. Circuit Court of Appeals in New York said U.S. District Judge Jed Rakoff abused his discretion in scuttling the civil accord, saying he failed to give "significant deference" to the SEC and was wrong to require the regulator to show the "truth" of what it alleged.

Rakoff had objected to the SEC's decades-old policy of letting some corporate defendants settle without admitting or denying its charges.

The decision makes it more likely the Citigroup accord will win approval, and lawyers said it may make it easier for the SEC to decide on its own how best to enforce securities laws, as well as win settlements without worrying that judges may reject them because of a lack of proven facts.

Writing for the 2nd Circuit, Circuit Judge Rosemary Pooler said it was "an abuse of discretion to require, as the district court did here, that the SEC establish the 'truth' of the allegations against a settling party as a condition for approving the consent decree.

"The district court's failure to make the proper inquiry constitutes legal error," she added.

Rakoff’s November 2011 rejection of the Citigroup settlement, which concerned a 2007 sale of mortgage-linked securities debt that caused more than $700 million of estimated investor losses, is credited with altering the public debate over SEC settlements that lack admissions of wrongdoing. It prompted other federal judges to scrutinize several similar accords closely.

Last June, citing the need for public accountability, SEC Chair Mary Jo White, a former federal prosecutor, adopted a policy of requiring admissions in certain major cases.   Continued...

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011.  REUTERS/Jonathan Ernst