On March 15, the Second Circuit Court of Appeals enjoined the widely covered trial court proceedings in Securities Exchange Commission v Citigroup Global Markets, Inc., No. 11-5227-cv(L).
Following the investigation of abuses during the recent financial crisis, the SEC brought charges against Citigroup for misleading investors in the sale of $1 billion in collateralized debt obligations (CDO’s) while Citigroup was secretly betting against the debt.
When the parties reached a settlement last fall and appeared before Southern District of New York Judge Jed Rakoff for approval, he instead rejected the settlement as unfair and against public interest, largely because there was no admission of wrongdoing by Citigroup. The parties were ordered to trial.
The Second Circuit stayed the trial proceedings for a number of reasons but prominent among them was the trial court’s focus on the admission of wrongdoing. Tellingly, the Court declared that it was aware of “no precedent that supports the proposition that a settlement will not be found to be fair, adequate, reasonable, or in the public interest unless liability has been conceded or proved and is embodied in the judgment.” “We doubt that a court’s discretion extends to refusing to allow such a litigant to reach a voluntary settlement in which it gives up things of value without admitting liability.”
So the good news is that settlements without an acknowledgment of liability continue to be favored. And although the Court did affirm that courts must not “rubber stamp” all such agreements, it stated clearly that settlements as this should not be rejected “without substantial reason for doing so.”