By Cydney Posner
Today, the SEC announced that it was seeking review in the U.S. Court of Appeals for the Second Circuit of Judge Rakoff's Citigroup decision (discussed in the article from 11/29/2011). Robert Khuzami, the Director of Enforcement, stated that he believed the lower court had "committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits….We believe the court was incorrect in requiring an admission of facts — or a trial — as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions. Indeed, in the case against Citigroup, the SEC filed suit after a thorough investigation, the findings of which were described in extensive detail in a 21-page complaint.
"The court's new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country. In fact, courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide.
"In cases such as this, a settlement puts money back in the pockets of harmed investors without years of courtroom delay and without the twin risks of losing at trial or winning but recovering less than the settlement amount - risks that always exist no matter how strong the evidence is in a particular case. Based on a careful balancing of these risks and benefits, settling on favorable terms even without an admission serves investors, including investors victimized by other frauds. That is due to the fact that other frauds might never be investigated or be investigated more slowly because limited agency resources are tied up in litigating a case that could have been resolved.
"In contrast, the new standard adopted by the court could in practical terms press the SEC to trial in many more instances, likely resulting in fewer cases overall and less money being returned to investors.
"To be clear, we are fully prepared to refuse to settle and proceed to trial when proposed settlements fail to achieve the right outcome for investors…. In deciding whether to settle, the SEC considers, among other things, limitations under the securities laws. In a case like Citigroup, the applicable statute does not entitle the SEC to recover the amount lost by investors. Instead, in addition to recovering a defendant's ill-gotten gains, the statute allows a monetary penalty only up to the amount of a defendant's gain."
The press release goes on. If he sounds just a tad defensive, it may not simply be the Rakoff decision that triggered it. The SEC may also be smarting from columns like this one in the NYT, courtesy of ProPublica, "In Hunt for Securities Fraud, a Timid S.E.C. Misses the Big Game": http://dealbook.nytimes.com/2011/12/14/in-hunt-for-securities-fraud-a-timid-s-e-c-misses-the-big-game/?src=me&ref=business and this one in The Atlantic, http://www.theatlantic.com/business/archive/2011/12/too-big-to-stop-why-big-banks-keep-getting-away-with-breaking-the-law/249952/, suggesting that the SEC has been subject to "regulatory capture."