Judge Rakoff's Ruling in S.E.C. v. Citigroup Global Markets

8/3/2019 Judge Rakoff's Ruling in S.E.C. v. Citigroup Global Markets

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

U.S. SECURITIES

COMMISSION,

AND EXCHANGE

x

11 Civ. 7387 (JSR)

P l a i n t i f f , OPINION AND ORDER

v -

CITIGROUP GLOBAL MARKETS INC.,

Defendant .

- - - - - - - - - - - - - x

JED S. RAKOFF, U.S.D.J .

On October 19, 2011, the U.S. Secur i t i e s and Exchange Commission

(the "S.E.C.U

) f i t h i s l awsui t , accusing defendant Cit igroup

Global Markets Inc. ("Cit igroup") of a subs t an t i a l s e cu r i t f raud.

According to the S.E.C. ' s Complaint , a f t e r Cit igroup rea l i zed in

- I

2007 t ha t the market fo r mortgage backed s ecur i t i e s was

beginning to weaken, t igroup crea ted a b i l l i on -do l l a r Fund (known

as "Class v Funding IIIU) t ha t al lowed it to dump some dubious asse t s

on misinformed inves to r s . This was accompl ished by Ci t ig roup ' s

misrepresen t ing t ha t the Fund 's asse t s were a t t r a c t i v e investments

r igorous ly s e l ec t ed by an independent inves tment adv i se r , whereas in

f ac t t igroup had arranged to include in the por t fo l io a subs t an t i a l

percentage of negat ive pro jec ted a s se t s and had then taken a shor t

pos i t ion in those very asse t s it had helped s e l e c t . Complaint I ,

2, 58. Having s t ruc tu red the Fund as a vehic fo r unloading

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dubious asse t s on unwi t t ing inves to r s , id . , 44, Ci t ig roup ized

n et pro f i t s of around $160 mil l ion , id . , 63t

whereas the inves to r s

as the S.E.C. l a t e r revea led , l o s t more than $700 mil l ion . See

S.E.C. ' s Memorandum of Law in Response to Quest ions Posed by the

Court Regarding Proposed Set t l ement ("SEC Mem.") a t 17.

In a para l l e l Complaint f i l ed the same day aga ins t Ci t ig roup

employee Brian Stoker , see U.S. Se c u r i t i e s and Exchange Commission v.

Brian H. Stoker , 11 Civ. 7388 (JSR) , the S.E.C. a l leged t h a t

Cit igroup knew in advance t h a t it would be d i f f i c u l t to s e l l the Fund

i f t i g roup d i sc losed i t s ion to use it as a vehic to unload

hand-picked s e t o f nega t ive ly pro jec ted asse t s , see Stoker

Complaint 25. Spec i f i ca l ly , paragraph 25 of th e Stoker Complaint

a l leges ( in language some of which i s notably miss ing from the

Ci t ig roup Complaint) t ha t :

t igroup knew it would be d i f f i c u l t to p lace the

l i a b i l i t i e s of [ the Fund] i f it d isc losed to inves to r s

i t s i n t en t ion to use the veh ic le to shor t a hand-picked

s e t of [poorly ra t ed asse ts ] .... By con t ras t ,

Ci t ig roup knew t h a t rep re sen t ing to inves to r s t ha t an

exper ienced t h i rd -p a r t y inves tment adv ise r had se lec ted

th e p o r t fo l i o would f a c i l the placement of th e [Fund's]l i a b i l i t i e s . (emphasis suppl ied)

Although t h i s would appear to be tantamount to an a l l ega t ion of

knowing and f raudulent i n t e n t ("sc ien te r , " in th e l ingo of s e c ur i t i e s

law), the S.E.C. , fo r reasons of i t s own, chose to charge Ci t ig roup

Nothing in th i s Opinion and Order has any bear ing on the case aga ins t Stoker ,

which i s cur r en t ly scheduled to commence t r i a l on Ju ly 16, 2012.

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only with negl igence, in v io la t ion of Sec t ions l7(a ) (2 ) and (3) of

the Secur i t s Act, 15 U.S.C. § 77q(a) (2 ) and (3) . Complaint 65.

Simultaneously with the f i l ing of i t s Complaint aga ins t

Ci t ig roup , the S.E.C. presented to the Court fo r i t s s ignature a

"Fina l Judgment As To Defendant t igroup Global Markets Inc ." ( the

"Consent Judgmentlf), t oge the r with a Consent of Defendant Ci t ig roup

Global Markets Inc . (the "Consent") t ha t rec t h a t Cit igroup

consented to the en t ry of the Consent Judgment" [w] i thout admit t ing

o r denying the a l l ega t ions of the complaint .... " Consent 2. The

Consent Judgment (I) "permanently r e s t r a i n e d and enjoined" t igroup

and i t s agen t s , employees, e t c . , from fu tu re v io la t ions of Sec t ions

l7(a) (2) and (3) of the Secur i t i e s Act, ( I I ) requi red Ci t ig roup to

disgorge to the S.E.C. Ci t ig roup ' s $160 mil l ion in p r o f i t s , plus $30

mil l ion in i n t e r e s t thereon, and to pay to th e S.E.C. a c i v i l pena l ty

in th e amount of $95 mil l ion , and ( I I I ) requ i red Ci t igroup to

under take fo r a per iod of three years , sub jec t to enforcement by th e

Court , c e r t a i n i n t e rna l measures designed to preven t recurrences of

the t i e s f raud here perpe t ra ted .

Upon rece ip t of these submiss ions , the Court , by Order dated

October 27, 2011, pu t some ques t ions to the pa r t i e s concerning the

proposed Consent Judgment, to which the pa r t i e s responded both in

wri t ing , see SEC Mem., supra , and Memorandum on Behalf of Ci t ig roup

Global Markets Inc. Support of the Proposed Fina l Judgment and

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Consent ("Ci t igroup Mem.")! and ora l ly ! see t r a n s c r i p t of o r a l

argument! 11/9/11 ("Tr. l l ) . Since then! th e Cour t has spen t long

hours t ry ing to determine whether, in view of the su b s t a n t i a l

deference due the S.E.C. in mat te rs o f t h i s kind, th e Cour t can

somehow approve t h i s problematic Consent Judgment. In th e end, the

Cour t concludes t h a t cannot approve i t ! because the Court has no t

been provided with any proven o r admit ted fac t s upon which to

exerc ise even a modest degree of independent judgment.

The Cour t t u rns f t to the s tandard of review. In i t s

o r i g i n a l Memorandum in suppor t of the proposed Consent Judgment!

f i l ed before the case had been ass igned to any judge, the S.E.C.

express ly endorsed the s tandard of review s e t fo r th by t h i s Court in

i t s Bank of America dec i s ions , i . e . ! "whether th e proposed Consent

Judgment ... i s fa i r ! reasonable! adequate , and in th e publ

in teres t . ! ! Memorandum By P l a i n t i f f Secur i t s and Exchange

Commission in Suppor t of Proposed Set t l ement a t 5 (quot ing with

approval SEC v. Bank of America Corp.! 653 F. Supp. 2d 507! 508

(S.D.N.Y. 2009) ("Bank of America Iff)) ; SEC v. Bank of

America Corp.! 2010 WL 624581! a t *6 (S.D.N.Y. Feb. 22, 2010) ("Bank

) . This was also th e S.E .C . ! s s ta ted pos i t ion in

another , in te rvening proceeding before t h i s Court , SEC v. Vitesse

Semiconductor Corp. , 77 1 F. Supp. 2d 304 (S.D.N.Y. 2010).

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In i t s most recen t f i l i ng in t h i s case , however, th e S.E.C.

pa r t l y reverses i t s previous pos i t ion and a s s e r t s t ha t , while th e

Consent Judgment must still be shown to be f a i r , adequate , and

reasonable , "the publ ic i n t e r e s t ... i s no t pa r t of [the] app l i cab le

s tandard o f j ud i c i a l review." SEC Mem. a t 4 n. 1. This i s er roneous .

A l a rge pa r t of what the S.E.C. reques t s , in t h i s and most o ther such

consent judgments , i s in junc t ive r e l i e f , both broadly , in the reques t

fo r an in junc t ion forbidding fu tu re v i o l a t i o n s , and more narrowly , in

th e reques t t ha t the Court enforce fu ture prophylac t ic measures

(here, fo r a th ree -year pe r iod) . The Supreme Court has repea tedly

made c lea r , however, t ha t a cour t cannot g ra n t the extraordinary

remedy of in junc t ive r e l i e f without cons ider ing the publ ic i n t e r e s t .

See, e . g . , eBay, Inc. v. MercExchange, 547 U.S. 388, 391

(2006) (UAccording to wel l -es tab l i shed p r i n c i p l e s of equ i ty , a

p l a i n t i f f seeking a permanent in junc t ion ... must demonstra te

t h a t th e publ ic i n t e r e s t would not be disse rved by a permanent

in junc t ion . H). Indeed, th e Court has held t ha t " ' In exercis ing t h e i r

d i sc re t ion , cour t s ... should pay p a r t i c u l a r regard fo r the publ ic

consequences in employing the ex t raord ina ry remedy of in junc t ion . "'

~ ~ ~ ~ ~ ~ ~ ~ = = ~ ~ ~ ~ = = = - ~ = = = = ~ ~ ~ ~ = = ~ ~ ~ , 555 U.S. 7, 24

(2008) (quoting Weinberger v. Romero-Barcelo, 456 U.S. 305, 31 2

(1982». S imi la r ly , the Second C i r cu i t has repea tedly s t a t e d , most

r ecen t ly in Sa l inge r v. Colt ing , 607 F.3d 68, 80 (2d Cir . 2010) , t h a t

5



a co u r t \\must ensure t ha t the publ ic i n t e re s t s would n ot be disse rved

by the suance" of an in junc t ion . rd . a t 80.

As a f a l l -back , th e S.E.C. sugges t s t h a t , i f the publ i c i n t e r e s t

must be t aken i n to account , the S.E.C. i s the so le determiner o f what

i s in th e publ ic i n t e r e s t in regard to Consent Judgments s e t t l i n g

S.E.C. cases . See SEC Mem. a t 4 n .1 ( c i t SEC v. Randolph, 736 F.2d

(9 th525, 529 Cir . 1984) . That , again , i s n ot the law. Although in

i t s somewhat delph ic dec i s ion in Randolph th e Ninth C i rc u i t found

t h a t , on the fac t s of t h a t case , t he re was no d i f fe rence between th e

requirement of reasonableness and the requirement of being in th e

publ i c i n t e r e s t , it was emphat ic in upholding " the appropr ia teness of

a requirement t ha t th e decree be in the publ ic i n t e r e s t . " a t 529.

More per t inen t ly , the D.C. C i r cu i t , in United S ta t e s v. Trucking

Employers. I n c . , 561 F.2d 313 (DC Cir . 1977), reaf f i rmed t h a t " p r io r

to approving a consent decree a cour t must s a t i s f y i t s e l f of the

se t t l emen t ' s ' ove ra l l f a i rnes s to b e n e f i c i a r i e s and consi s t ency with

the publ ic i n t e r e s t . ' " Id . a t 31 9 (quot ing Uni ted S ta t e s v.

(5 thAllegheny Ludlum Indus t r i es , 517 F.2d 826, 850 Cir .

1975) (emphasis supp l i ed ) . As these and s imi l a r a u thor i t i e s make

p la in , a cour t , while giv ing su b s t a n t i a l deference to the views of an

admin i s t ra t body ves ted with au thor i ty o v er a p a r t i c u l a r area ,

must still exe rc i se a modicum of independent judgment in determining

whether the requested deployment i t s in junc t ive powers wi l l serve ,

6



or d isse rve! publ ic i n t e r e s t . Anything l e s s would not only

v io la t e the c o n s t i t u t i o n a l doctr ine of separa t ion of powers b ut would

undermine the independence t ha t i s the indispensable a t t r i bu t e of the

f edera l j ud ic i a ry .

As a pra c t i c a l matter! moreover! and as implies! th e

requirement t ha t a consent judgment be in th e publ i c i n t e r e s t not

meaningful ly severable from the requirements! still acknowledged by

th e S.E.C.! t ha t the consent judgment be fa i r ! reasonable, and

adequate; fo r a l l these requirements inform each o ther . For example,

before the Court determines whether the proposed Consent Judgment i s

adequate , must answer a pre l iminary ques t ion: adequate fo r what

purpose? The answer, a t l eas t in par t , i s t h a t the se t t l emen t must

be adequate to ensure t ha t the publ i c i n t e r e s t i s pro tec ted . See

Randolph, 736 F.2d a t 529 (" the SEC ought to always be required to

serve publ ic i n t e res tH) . The same ana lys i s app l ies to the

determinat ion of th e ss of the se t t l emen t . Before th e Court

determines whether the se t t l ement i s f a i r , it must ask a l iminary

ques t ion: f a i r to whom? As the hold ing of Trucking Employers quoted

above makes p la in , the answer i s f a i r to the pa r t i e s to th e

publ

without mult ip ly ing examples, it i s c l e a r t ha t before a cour t

may employ i t s in junc t ive and contempt powers in suppor t of an

adminis t ra t ive se t t lement ! it i s requi red , even a f t e r giving

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subs tan t i a l deference to the views of the admin is t r a t ive agency, to

be s a t i s f i e d t h a t it i s not being used as a too l to enforce an

agreement t h a t i s unfa i r , unreasonable , inadequate , o r in

con t raven t ion of th e publ ic i n t e r e s t .

Applying these s t andards to the case in hand, th e Cour t

concludes , r e g re t fu l l y , t h a t th e proposed Consent Judgment i s ne i the r

f a i r , nor reasonab le , nor adequate , nor in th e publ ic i n t e r e s t . Most

fundamenta l ly , t h i s i s because it does not p rov ide the Cour t with a

s u f f i c i e n t ev iden t ia ry bas i s to know whether the reques ted r e l i e f i s

j u s t i f i e d under any of these s t andards . Pure ly pr iva te pa r t i e s can

s e t t l e a case wi thou t ever agreeing on th e fac t s , fo r a l l t h a t i s

requi red i s t h a t a p l a i n t i f f dismiss h is complain t . 2 But when a

publ ic agency asks a cour t to become i t s p a r tn e r in enforcement by

imposing wide-ranging in junc t ive remedies on a defendan t , enforced by

the formidable j ud i c i a l power of contempt,3 th e cour t , and the

publ ic , need some knowledge of what the underly ing fac t s are : for

otherwise , the co u r t becomes a mere handmaiden to a se t t l ement

pr iva te ly negot ia ted on the bas i s of unknown f a c t s , while the publ ic

2 When the pr iva te p a r t i e s go fu r the r and ask a cour t to r e t a i n j u r i s d i c t i o n to

enforce th e se t t l ement , a cour t has t o t a l d i sc r e t i o n whether o r no t to do so , see

genera l ly Kokkonen v. Guardian Life Insurance Co., 511 U.S. 375, 381 (1994), and

many judges in th i s D i s t r i c t rou t ine ly dec l ine to approve a s t i p u l a t i o n of th e

p a r t i e s t h a t so provides .

3 The Second Circu i t has descr ibed the contempt power as "among the most formidable

weapons in th e c o u r t ' s ar sena l . " United Sta tes v. Local 1804-1, Int'l

Longshoremen's Ass 'n , AFL-CIO, 44 F.3d 1091, 1095 (2 d Cir . 1995) .

8



i s deprived of ever knowing the t r u th in a mat te r of obvious publ ic

impor tance .

Here, the S .E .C . ' s long-s tand ing po l icy - hal lowed by h i s to r y ,

but no t by reason - of a l lowing defendan ts to en te r in to Consent

Judgments withou t admit t ing o r denying th e underly ing a l lega t ions ,4

deprives the Cour t of even th e most minimal assurance t ha t the

su b s t a n t i a l in junc t ive r e l i e f it i s being asked to impose has any

bas i s in There i s little r e a l doubt t h a t Ci t ig roup con tes t s

the f ac tua l a l l eg a t i o n s of th e Complaint . In co l loquy wi th the

Court , counsel Ci t ig roup express ly reconfi rmed t h a t h is c l i e n t

was no t admit t ing the a l l eg a t i o n s of th e Complaint , see t r . 13. He

a l so noted , cor rec t ly , t h a t he was f ree - notwi ths tand ing the

S .E .C . ' s gag orde r prec lud ing Ci t ig roup from con te s t ing the S .E .C . ' s

a l l eg a t i o n s in the media 5- to fu l ly con te s t the fac t s in any

p a r a l l e l l i t i g a t i o n ; and he s t rong ly h in ted t h a t Ci t ig roup would do

j u s t t h a t . Tr. 26-27; see Cit ibank Mem. a t 7-8 , 11.

The S.E .C. , by co n t r a s t , took th e pos i t ion t ha t , because

Cit igroup d id no t express ly deny the a l l ega t ions , the Court , and th e

4 See Vitesse , 771 F. Supp. 2d a t 308-10 ( t racing th e h is to ry of the pol icy) .

On i t s face, the SEC's no-denia l po l icy ra i ses a p o te n t i a l F i r s t Amendment

problem. See~ ~ ~ ~

771 F. Supp. 2d a t 309 ("[Hlere an agency of the UnitedSta tes i s say ing , in e f f e c t , 'Although we claim tha t these defendants have done

t e r r i b l e th ings , refuse to admit it an d we do not propose to prove it, butw i l l simply re so r t to gagging t h e i r r igh t to i t 'H) ; see Crosby v.

Brads t ree t Co., 31 2 F.2d 483, 48 5 (2 d Cir . 1963) ( revers ing a consent se t t l ement

between tw o p a r t i e s because the " in junc t ion , enforceable through the contempt

power, const i tu te[d] a r e s t r a i n t by the United Sta tes aga ins t the pub l i ca t ion

of f ac t s which the community has a to knowH) .

9



publ i c , somehow knew t r u th the a l l e g a t i o n s . Tr. 12-13. This

i s wrong as a mat te r of law and unpersuasive as a mat te r of f a c t . As

a mat te r of law, an a l l e g a t i o n t h a t i s ne i the r admit ted nor denied

simply t ha t , an a l l e g a t i o n . I t has no ev iden t ia ry va lue and no

co l l a t e ra l es toppe l e f f e c t . I t i s prec ly fo r t h i s reason t ha t the

Second C i r cu i t held long ago, in Lipsky v. Commonwealth United Corp.,

551 F.2d 887 (2d Cir . 1976), t h a t "a consent judgment between a

fede ra l agency and a pr iva te corpora t ion which i s no t the r e s u l t of

an ac tua l ad jud ica t ion of any of the i s sues ... can no t be used as

evidence in subsequent l i t i g a t i o n . " Id . a t 893. I t l lows t h a t th e

a l l ega t ions of the complain t t ha t gives r i s e to the consen t judgment

are not evidence of anything e i the r . Indeed th e Lipsky cour t went so

fa r as to hold t h a t "ne i the r [an S.E.C.] complain t nor re fe rence to

[such] a complain t which r e s u l t s in a consent judgment may proper ly

be c i ted in the pleadings" in a p a r a l l e l pr iva te ac t ion and must

ins tead be s t r i cken . Id .

As fo r common experience, a consent judgment t ha t does not

involve any admiss ions and t h a t r e s u l t s in only very modest pena l t i e s

i s j u s t as f requent ly viewed, pa r t i c u l a r ly in the bus iness community,

as a cos t of doing business imposed by having to main ta in a working

re l a t ionsh ip with a regu la to ry agency, r a the r than as any i nd ica t ion

of where the r e a l t r u th l i e s . This , indeed, i s Ci t ig roup ' s pos ion

in t h i s very case . See Ci t ig roup Mem. a t 6-8 .

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Of course , th e pol i cy of accep t ing se t t l ement s without any

admiss ions serves var ious narrow i n t e re s t s of th e p a r t i e s . In t h i s

case , fo r example, Cit igroup was ab le , without admi t t ing anyth ing , to

nego t ia te a se t t l ement t h a t (a ) charges it only wi th negl igence, (b)

r e s u l t s in a very modest pena l ty , (c) imposes the kind of in junc t ive

r e l i e f t h a t Cit igroup (a r e c id iv i s t ) knew t ha t th e S.E.C. had not

sought to enforce aga ins t any f inanc ia l i n s t i t u t ion fo r a t l e a s t th e

l a s t 10 years , see SEC Mem. a t 23, and (d) imposes r e l a t i ve l y

inexpensive prophylac t ic measures fo r th e next th ree yea rs . In

exchange, Ci t ig roup not on ly s e t t l e s what it s t a t e s was a broad-

ranging four-year i nves t iga t ion by the S.E.C. of C i t ig r o u p ' s

mortgage-backed s e c ur i t i e s o f f e r i n g s , Tr. 27, but a l so avoids any

inves to r s ' r e ly ing in any re spec t on th e S.E.C. Consent Judgment in

seeking r e tu rn of t h e i r lo s ses . I f th e a l l ega t ions of the Complaint

are t rue , th i s i s a very good dea l for Ci t igroup; and, even i f they

are unt rue , it i s a mild and modest cos t of doing bus iness .

I t i s harder to d iscern from th e l imi ted in fo rmat ion before the

Court what the S.E.C. i s ge t t ing from t h i s se t t l ement o the r than a

quick headl ine . By th e S.E.C. ' s own account , Ci t ig roup i s a

r e c id iv i s t , SEC Mem. a t 21, and ye t , in terms o f de te r rence , th e $95

mil l ion c i v i l pena l ty t h a t the Consent Judgment proposes i s pocket

change to any en t i t y as l a rge as Ci t ig roup . While th e S.E.C. cla ims

Although th e S.E.C. a s s e r t s t h a t the f ac t t h a t it i s only charging negl igence

l imi t s the amount of money it can recover from Ci t ig r oup , e i t he r by wa y of c i v i l

11

6



t h a t it i s devoted, not j u s t to the p r o t ec t i o n of inves to r s b ut a l so

to helping them recover t h e i r lo s ses , th e proposed Consent Judgment,

in the form submit ted to the Court , does not commit the S.E.C. to

re tu rn ing any of th e t o t a l of $285 mil l ion obta ined from Cit igroup to

the def rauded inves to r s but only suggests t h a t the S.E.C. "may" do

so . Consent Judgment a t 3. In any even t , t h i s still leaves the

def rauded inves to r s su b s t a n t i a l l y short -changed. To be su re , a t o ra l

argument, the S.E.C. reaf f i rmed i t s long s tand ing purpor ted suppor t

fo r pr iva te c i v i l ac t ions des igned to recoup i nves to rs ' lo s ses . Tr.

10. But in a c tua l i t y , th e combinat ion of charg ing t i g roup only

wi th negl igence and then pe rmi t t i ng Ci t ig roup to s e t t l e without

e i t h e r admi t t ing o r denying th e a l l ega t ions dea l s a double blow to

any as s i s tance th e def rauded inves to r s might seek to der ive from the

S.E.C. l i t i g a t i o n in a t t empt ing to recoup t h e i r lo s ses th rough

pr iva te l i t i g a t i o n , s ince pr iva te inves to r s not only cannot br ing

s e c ur i t i e s cla ims based on neg l igence , see, , Ernst & E rn s t v.

Hochfelder , 425 U.S. 185 (1976), bu t also cannot de r ive any

c o l l a t e r a l es toppel as s i s tance from Ci t ig roup ' s non admiss ion/non-

den ia l of the S .E .C . ' s a l l ega t ions . Nor, as noted , does the publ i c ,

penal ty o r by way of disgorgement , see SEC Mem. a t 17, it acknowledges in a

footnote t h a t the Second C i r c u i t has assumed t h a t "equ i tab le r es t i tu t ion" i s

ava i l ab le in any government enforcement ac t ion . SEC Mem. a t 17 n.6 ( c i t ing

v. Ver i ty lnt'l, Ltd . , 443 F.3d 48, 66 (2 d Cir . 2006)) .

12



es p ec i a l l y the bus iness publ i c , have any reason to c r e d i t those

a l l eg a t i o n s , which remain e n t i r e l y unproven. 7

The poin t , however, i s n o t t h a t c e r t a in narrow i n t e re s t s o f the

pa r t i e s might no t be served by the Consent Judgment , bu t r a t h e r t h a t

the p a r t success fu l r eso lu t ion of t h e i r compet ing i n t e r e s t s

cannot be automat ica l ly equa ted with th e publ i c i n t e r e s t , es p ec i a l l y

in th e absence of a f ac tu a l base on which to asse ss whether the

r eso lu t ion wa s f a i r , adequa te , and reasonab le . Even a f t e r giv ing the

f u l l e s t deference to the S.E.C. ' s views - which have more than once

"The Court i s a l so t roub led when it compares the proposed Consent Judgment with the

consent judgment en te red l a s t year between the SEC and Goldman Sachs ("Goldman").See SEC v. Goldman Sachs & Co. e t a l . , No. 10 Civ. 3229 (BSJ), Dkt. 25 ("Goldman

Consent Judgment") . Goldman involved a s imi la r but arguably l e s s egregious f ac tua l

scenar io in tha t Goldman was charged with no t d i sc los ing t h a t an ou ts ide hedge

fund, Paulson & Co. , had played a s ig n i f i c a n t ro le in the por t fo l io se lec t ion

a shor t pos i t ion in the asse t s it had se lec ted . SECrocess and had maintainedsupra , Dkt. 1 ("Goldman Complaint") 2. Nonetheless , th e

consent judgment in Goldman required Goldman to pay a $535 mil l ion pena l ty , eventhough it made only $1 5 mil l ion in pr o f i t s . Goldman Consent Judgment 2. Here,as noted above, Citigroup made $160 mil l ion in pr o f i t s and pa id only a $9 5 mil l ion

f ine . The SEC argues t h a t Goldman was charged with based v io la t ions , and

t h a t those v io la t ions make possib le a more s ig n i f i c a n t sanc t ion .SEC Mem.

a t 19.This log ic i s c i r c u l a r , however, because the SEC does not exp la in how Goldman's

act ions were more culpable or scienter -based than Ci t ig roup ' s ac t ions here .

Furthermore, the consent judgment in Goldman conta ined severa l terms t ha t are

notably missing from the proposed Consent Judgment here . Fi r s t , the consentjudgment included the fol lowing express admission from Goldman:

"Goldman acknowledges tha t the market ing mater ia ls for the ABACUS 2007-

ACI t r ansac t ion conta ined incomplete informat ion. In par t i cu l a r , it was

a mistake fo r th e Goldman market ing mater ia ls to s t a t e t h a t the

reference p o r t f o l i o wa s ' s e lec ted by ' ACA Management LLC withoutdisclosing the ro le of Paulson & Co. Inc . in the por t fo l io se lec t ion

process and t ha t Paulson 's economic i n t e r e s t s were adverse to

[por t fo l io] i nves to r s . Goldman reg re t s tha t the market ing mater i a l s d id

not contain tha t d i sc losu re . "

(Goldman Consent Judgment 3 .) Second, Goldman agreed to add i t iona l remedialmeasures beyond those agreed to by Cit igroup in the i n s t a n t case. Third , Goldman

agreed to cooperate with the SEC in a number of ways, such as making i t s employeesava i l ab le for in terviews by SEC s t a f f and order ing i t s employees to t e s t i f y "a t

t r i a l and o ther j ud i c i a l proceedings when requested by Commission s t a f f . " Id . 17.

By con t r as t , Cit igroup has no t agreed to cooperate with the SEC in any cognizablerespect . SEC Mem. 21.

13



persuaded th i s Court to approve an S.E.C. Consent Judgment it found

dubious on th e mer i t s , see , e . g . , Bank of America I I , supra th e

Cour t i s fo rced to conclude t h a t a proposed Consent Judgment t ha t

asks th e Court to impose su b s t a n t i a l in junc t ive r e l i e f , enforced by

the Cour t ' s own contempt power, on th e bas i s of a l l ega t ions

unsupported by any proven o r acknowledged fac t s whatsoever , i s

ne i the r reasonab le , nor f a i r , nor adequate, nor in th e publ ic

i n t e re s t .

I t i s not reasonable , because how can it ever be reasonab le to

impose su b s t a n t i a l r e l i e f on th e bas i s of mere a l l eg a t i o n s ? It i s

not f a i r , because, desp i te C i t ig roup ' s nominal consent , th e p o t e n t i a l

fo r abuse in imposing pena l t i e s on th e b as i s o f fac t s t ha t a re

ne i the r proven nor acknowledged p a t en t . I t i s not adequate,

because , in th e absence of any f a c t s , the Court l acks a framework fo r

determining adequacy. And, most obvious ly , the proposed Consent

Judgment does not serve the publ ic i n t e r e s t , because it asks the

Cour t to employ i t s power and a s s e r t i t s au thor i ty when it does not

know the f a c t s .

An app l ica t ion of j ud i c i a l power t ha t does not r e s t on fac t s i s

worse than mindless , it i s inheren t ly dangerous. The in junc t ive

power o f the j ud ic i a ry i s not a f r ee rov ing remedy to be invoked a t

th e whim of a regula tory agency, even with th e consen t of the

regu la t ed . I f i t s deployment does not r e s t on fac t s

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so l id fac t s , es tab l i shed e i by admiss ions or by t r i a l s - it

serves no lawful or moral purpose and i s s imply an engine of

oppression.

Fina l ly , in any case l ike t h i s t ha t touches on the t ransparency

of f i n an c i a l markets whose gyra t ions have so depressed our economy

and de b i l i t a t e d our l i v e s , the re i s an ove r r id ing pub l i c i n t e r e s t in

knowing the t r u th . In much of the world, propaganda r e igns , and

t r u th i s confined to sec re t ive , fea r fu l whispers . Even in our

nat ion , apo log is t s fo r suppress ing o r obscuring th e t ru t h may always

be found. But the S .E .C. , of a l l agencies , has a duty , i nhe ren t in

i t s s t a t u t o ry mission, to see t h a t the t r u th emerges; and i f f a i l s

to do so , t h i s Court must not , in the name of deference or

convenience , gran t j u d i c i a l enforcement to the agency ' s cont r ivances .

Accordingly, the Court re fuse s to approve th e proposed Consent

Judgment. Ins tead , th e Court hereby conso l ida t e s t h i s case wi th the

Stoker ac t ion , adopts the Case Management Order i n tha t ac t i o n as

equa l ly appl icable to the i n s t a n t case , and d i r e c t s th e pa r t s to be

ready to t ry t h i s case on Ju ly 16, 2012.

SO ORDERED.

Dated: New York, NY

November 28, 2011

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Documents

Judge Rakoff's Ruling in S.E.C. v. Citigroup Global Markets