UNITED STATES SECURITIES AND EXCHANGE COMMISSION v. CITIGROUP GLOBAL MARKETS, INC.
Docket Nos. 11-5227-cv (L); 11-5375-cv(con), 11-5242-cv(xap)
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
Argued: February 8, 2013 Decided: June 4, 2014
August Term, 2012
The United States Securities and Exchange Commission (“S.E.C.“) appeals from the November 28, 2011 order of the United States District Court for the Southern District of New York (Jed S. Rakoff, J.) refusing to approve a settlement between the S.E.C. and Citigroup Global Markets Inc. and setting a trial date. Our Court stayed the order on March 15, 2012. S.E.C. v. Citigroup Global Mkts., Inc., 673 F.3d 158 (2d Cir. 2012). We find the district court abused its discretion in by applying an incorrect legal standard in its review, and vacate and remand for further proceedings consistent with this opinion.
Vacated and remanded.
MICHAEL A. CONLEY, Deputy General Counsel, Securities and Exchange Commission (Jacob H. Stillman, Solicitor, Mark Pennington, Assistant General Counsel, Jeffrey A. Berger, Senior Counsel, on the brief), Washington, D.C., for Plaintiff-Appellant-Cross-Appellee United States Securities and Exchange Commission.
BRAD S. KARP, Paul, Weiss, Rifkind, Wharton & Garrison, LLP (Theodore V. Wells, Jr., Mark F. Pomerantz, Walter Rieman, Susanna M. Buergel, on the brief), New York, N.Y., for Defendant-Appellee-Cross-Appellant Citigroup Global Markets, Inc.
JOHN R. WING, Lankler Siffert & Wohl LLP (Patrick P. Garlinger, on the brief), New York, N.Y., Appointed Pro Bono Counsel for the United States District Court for the Southern District of New York (Jed S. Rakoff, J.).
MARK A. PERRY, Gibson, Dunn & Crutcher, LLP, Washington, D.C., for Amicus Curiae Business Roundtable, in support of reversal.
WILLIAM MICHAEL CUNNINGHAM, Temple Hills, MD, Amicus Curiae pro se, in support of affirmance.
MATTHEW G. YEAGER, PH.D., Department of Sociology, King‘s University College, London, Ontario (William Calathes, Department of Criminal Justice, New Jersey City University, Jersey City, N.J., on the brief), Amici Curiae pro se, in support of affirmance.
BARBARA J. BLACK, Charles Hartsock Professor of Law & Director, Corporate Law Center, University of Cincinnati College of Law, Cincinnati, Ohio, for Amici Curiae Securities Law Scholars Jayne W. Barnard, Douglas M. Branson, Chris J. Brummer, Samuel W. Buell, John C. Coffee, Jr., James D. Cox, James D. Fanto, Jill E. Fisch, Tamar Frankel, Theresa Gabaldon, Joan MacLeod Heminway, Thomas W. Joo, Lawrence E. Mitchell, Jennifer O‘Hare, Alan R. Palmiter, Margaret V. Sachs, Faith Stevelman, and Lynn A. Stout, in support of affirmance.
AKSHAT TEWARY, Edison, N.J., for Amicus Curiae Occupy Wall Street - Alternative Banking Group, in support of affirmance.
TERESA MARIE GOODY, Kalorama Legal Services, PLLC, Washington, D.C., for Amicus Curiae Harvey L. Pitt, in support of affirmance.
LORI ALVINO MCGILL, Latham & Watkins LLP, (Robin S. Conrad, Rachel Brand, National Chamber Litigation Center, Inc.; James M. Spears, Melissa B. Kimmel, Pharmaceutical Research and Manufacturers of America, on the brief), Washington, D.C., for Amici Curiae Chamber of Commerce of the United States and
ANNETTE L. NAZARETH, Davis Polk & Wardwell LLP (Edmund Polubinski III, Gina Caruso, on the brief) New York, N.Y., for Amicus Curiae Securities Industry and Financial Markets Association, in support of reversal.
DANIEL P. CHIPLOCK, Lieff Cabraser Heimann & Bernstein, LLP, New York, N.Y., for Amicus Curiae National Association of Shareholder and Consumer Attorneys, in support of reversal.
POOLER, Circuit Judge:
The United States Securities and Exchange Commission (“S.E.C.“) in conjunction with Citigroup Global Markets, Inc. (“Citigroup“) appeals from the November 28, 2011 order of the United States District Court for the Southern District of New York (Rakoff, J.) refusing to approve a consent decree entered into by the parties and instead setting a trial date. Our Court stayed that order and referred the matter to a merits panel for consideration of the underlying questions. S.E.C. v. Citigroup Global Markets, Inc., 673 F.3d 158 (2d Cir. 2012). We now hold that the district court abused its discretion by applying an incorrect legal standard in assessing the consent decree and setting a date for trial.
I. Complaint and proposed consent judgment.
In October 2011, the S.E.C. filed a complaint against Citigroup, alleging that Citigroup negligently misrepresented its role and economic interest in structuring and marketing a billion-dollar fund, known as the Class V Funding III (“the Fund“), and violated
Shortly after filing of the complaint, the S.E.C. filed a proposed consent judgment. In the proposed consent judgment, Citigroup agreed to: (1) a
The S.E.C. also filed a parallel complaint against Citigroup employee Brian Stoker. See S.E.C. v. Brian H. Stoker, 11 Civ. 7388 (JSR). The Stoker complaint alleged that Stoker negligently violated
II. Proceedings before the district court.
The district court scheduled a hearing in the matter, and presented the S.E.C. and Citigroup with a list of questions to answer. The questions included:
- Why should the Court impose a judgment in a case in which the
S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing? - Given the S.E.C.‘s statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the S.E.C.‘s charges are true? Is the interest even stronger when there is no parallel criminal case?
- How was the amount of the proposed judgment determined? In particular, what calculations went into the determination of the $95 million penalty? Why, for example, is the penalty in this case less than one-fifth of the $535 million penalty assessed in S.E.C. v. Goldman Sachs & Co. . . . ? What reason is there to believe this proposed penalty will have a meaningful deterrent effect?
- The proposed judgment imposes injunctive relief against future violations. What does the S.E.C. do to maintain compliance? How many contempt proceedings against large financial entities has the S.E.C. brought in the past decade as a result of violations of prior consent judgments?
- Why is the penalty in this case to be paid in large part by Citigroup and its shareholders rather than by the “culpable individual
offenders acting for the corporation?” [] If the S.E.C. was for the most part unable to identify such alleged offenders, why was this? - How can a securities fraud of this nature and magnitude be the result simply of negligence?
Both the S.E.C. and Citigroup submitted written responses to the district court‘s questions. On November 9, 2011, the district court conducted a hearing to explore the questions presented. A few weeks later, the district court issued a written opinion declining to approve the consent judgment. S.E.C. v. Citigroup Global Markets Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011) (”Citigroup I“). The district court stated that
before a court may employ its injunctive and contempt powers in support of an administrative settlement, it is required, even after giving substantial deference to the views of the administrative agency, to be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.
Id. at 332. It found that the proposed consent decree
is neither fair, nor reasonable, nor adequate, nor in the public interest . . . because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards. Purely private parties can settle a case
without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.
Id. (footnotes omitted).
The district court criticized the relief obtained by the S.E.C. in the consent decree, comparing it unfavorably with settlements entered in S.E.C. v. Bank of America Corp., No. 09 Civ. 6829(JSR), 2010 WL 624581 (S.D.N.Y. Feb. 22, 2010), and in S.E.C. v. Goldman Sachs & Co. et al., No. 10 Civ. 3229 (BSJ), Docket No. 25 (S.D.N.Y. July 20, 2010). See Citigroup I, 827 F. Supp. 2d at 330-31, 334 n.7. In both Bank of America and Goldman Sachs, the district court noted, the parties stipulated to certain findings of facts. Without such an evidentiary basis in this case, the district court reasoned, “the Court is forced to conclude that a proposed Consent Judgment that asks the Court to impose substantial injunctive relief, enforced by the Court‘s own contempt power, on the basis of allegations unsupported by any
Thus, the district court concluded:
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.
The district court refused to approve the consent judgment, and instead consolidated this case with the Stoker action and ordered the parties to be prepared to try both cases on July 16, 2012.
III. Prior proceedings before this Court.
The S.E.C. and Citigroup filed immediate notices of appeal. The S.E.C. also moved in the district court for an emergency stay pending the outcome of the appeal, but before the district court could decide the stay motion before it, the S.E.C. sought an emergency stay in our Court. As an alternative basis for relief, the S.E.C. also filed a petition for a writ of mandamus to set the order aside.
Our Court disagreed, granting the motion for a stay pending before us. S.E.C. v. Citigroup Global Markets Inc., 673 F.3d 158 (2d Cir. 2012) (”Citigroup III“). We concluded that the S.E.C. demonstrated a strong likelihood of success on the merits, because the district court did not accord the S.E.C.‘s judgment adequate deference. Id. at 163-65. As both parties before us advocated for approving the consent order, we ordered counsel appointed to advocate for the district court‘s order. Id. at 169. Before us now is the merits appeal.
We review the district court‘s denial of a settlement agreement under an abuse of discretion standard. See S.E.C. v. Wang, 944 F.2d 80, 85 (2d Cir. 1991). A district court abuses its discretion if it “(1) based its ruling on an erroneous view of the law,” (2) made a “clearly erroneous assessment of the evidence,” or (3) “rendered a decision that cannot be located within the range of permissible decisions.” Lynch v. City of New York, 589 F.3d 94, 99 (2d Cir. 2009) (internal quotation marks omitted).
I. Appellate jurisdiction.
The S.E.C. argues that we have jurisdiction to consider this interlocutory appeal pursuant to
(a) [T]he courts of appeals shall have jurisdiction of appeals from:
(1) Interlocutory orders of the district courts of the United States, . . . or of the judges thereof, granting, continuing, modifying, refusing or dissolving injunctions, or refusing to dissolve or modify injunctions. . . .
“Because § 1292(a)(1) was intended to carve out only a limited exception to the final-judgment rule, we have construed the statute narrowly to ensure that
In Carson, the consent decree at issue permanently enjoined an employer and a union from discriminating against African-American employees, required changes to the way seniority and benefits were awarded, established hiring goals, and granted job bidding preferences. 450 U.S. at 84. The Carson court found the district court‘s refusal to approve the consent decree constituted irreparable harm because:
the District Court made clear that it would not enter any decree containing remedial relief provisions that did not rest solidly on evidence of discrimination and that were not expressly limited to actual victims of discrimination. In ruling so broadly, the court did more than postpone
consideration of the merits of petitioners’ injunctive claim. It effectively foreclosed such consideration. Having stated that it could perceive no vestiges of racial discrimination on the facts presented, and that even if it could, no relief could be granted to future employees and others who were not actual victims of discrimination, the court made clear that nothing short of an admission of discrimination by respondents plus a complete restructuring of the class relief would induce it to approve remedial injunctive provisions.
Id. at 87 n.12 (internal quotation marks omitted). Moreover, the Carson court found that “[b]ecause a party to a pending settlement might be legally justified in withdrawing its consent to the agreement once trial is held and final judgment entered, the District Court‘s order might thus have the ‘serious, perhaps irreparable, consequence’ of denying the parties their right to compromise their dispute on mutually agreeable terms.” Id. at 87–88 (footnote omitted). Finally, by delaying approval of the consent decree, the plaintiffs were losing access to the “specific job opportunities and the training and competitive advantages that would come with those opportunities.” Id. at 89 n.16.
In New York v. Dairylea Cooperative, Inc., the parties entered into a settlement to resolve a civil antitrust action. 698 F.2d 567, 568-69 (2d Cir. 1983). The settlement included a provision labeled “Injunction” that:
would enjoin Dairylea from participating in any agreement to fix the price of milk or allocate customers during the next six years. . . . Dairylea [also] agreed to allow New York access to its books, records and personnel and to publicize, among its employees, the terms of the arrangement for the purpose of ensuring Dairylea‘s compliance with the decree‘s provisions.
Id. at 569. We found that the proposed injunction did not meet the requirements of Carson because the settlement agreement proposed minimal injunctive relief: defendants were enjoined from violating the law. Id. at 570. The parties argued that “because the proposed settlement would enjoin Dairylea from participating in any conspiracy to fix prices or allocate customers,” the “order disapproving the settlement is in effect the denial of an injunction.” Id. We disagreed:
Taken to its extreme [] this argument would render the disapproval of every proposed settlement appealable. It would be a simple matter for the settling parties to include in the agreement an injunctive provision forbidding one party from violating the law. The mere existence of an injunctive clause, therefore, cannot be sufficient to render the disapproval of a proposed settlement agreement appealable.
Thus, to bring an interlocutory appeal from a district court‘s denial of settlement approval, a party must demonstrate “that (1) the district court, by
II. The scope of the consent decree.
We quickly dispense with the argument that the district court abused its discretion by requiring Citigroup to admit liability as a condition for approving the consent decree. In both the briefing and at oral argument, the district court‘s
III. The scope of deference.
We turn, then, to the far thornier question of what deference the district court owes an agency seeking a consent decree. Our Court recognizes a “strong federal policy favoring the approval and enforcement of consent decrees.” Wang, 944 F.2d at 85. “To be sure, when the district judge is presented with a proposed consent judgment, he is not merely a ‘rubber stamp.‘” S.E.C. v. Levine, 881 F.2d 1165, 1181 (2d Cir. 1989). The district court here found it was “required, even after giving substantial deference to the views of the administrative agency, to be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.” Citigroup I, 827 F. Supp. 2d at 332. Other district courts in our Circuit view “[t]he
The “fair, reasonable, adequate and in the public interest” standard invoked by the district court finds its origins in a variety of cases. Our Court previously held, in the context of assessing a plan for distributing the proceeds of a proposed disgorgement order, that “once the district court satisfies itself that the distribution of proceeds in a proposed S.E.C. disgorgement plan is fair and reasonable, its review is at an end.” Wang, 944 F.2d at 85. The Ninth Circuit— in circumstances similar to those presented here, a proposed consent decree aimed at settling an S.E.C. enforcement action—noted that “[u]nless a consent decree is unfair, inadequate, or unreasonable, it ought to be approved.” S.E.C. v. Randolph, 736 F.2d 525, 529 (9th Cir. 1984).
We omit “adequacy” from the standard. Scrutinizing a proposed consent decree for “adequacy” appears borrowed from the review applied to class action settlements, and strikes us as particularly inapt in the context of a proposed S.E.C. consent decree. See
A court evaluating a proposed S.E.C. consent decree for fairness and reasonableness should, at a minimum, assess (1) the basic legality of the decree, see Benjamin v. Jacobson, 172 F.3d 144, 155-59 (2d Cir. 1999) (terminating existing consent decrees as required by the Prison Litigation Reform Act); (2) whether the terms of the decree, including its enforcement mechanism, are clear, see, e.g., Angela R. ex rel. Hesselbein v. Clinton, 999 F.2d 320, 325 (8th Cir. 1993) (district court abused its discretion by approving consent decree that did not properly define the enforcement mechanisms); (3) whether the consent decree reflects a resolution of the actual claims in the complaint; and (4) whether the consent decree is tainted by improper collusion or corruption of some kind. Cf. Kozlowski v. Coughlin, 871 F.2d 241, 244 (2d Cir. 1989) (“Before entering a consent judgment, the district court must be certain that the decree 1) springs from and serves to resolve a dispute within the court‘s subject-matter jurisdiction, 2) comes within the general scope of the case made by the pleadings, and 3) furthers the objectives
It is an abuse of discretion to require, as the district court did here, that the S.E.C. establish the “truth” of the allegations against a settling party as a condition for approving the consent decrees. Citigroup I, 827 F. Supp. 2d at 332-33. Trials are primarily about the truth. Consent decrees are primarily about pragmatism. “[C]onsent decrees are normally compromises in which the parties give up something they might have won in litigation and waive their rights to litigation.” United States v. ITT Continental Baking Co., 420 U.S. 223, 235 (1975). Thus, a consent decree “must be construed as . . . written, and not as it might have been written had the plaintiff established his factual claims and legal theories in litigation.” United States v. Armour & Co., 402 U.S. 673, 682 (1971). Consent decrees provide parties with a means to manage risk. “The
As part of its review, the district court will necessarily establish that a factual basis exists for the proposed decree. In many cases, setting out the colorable claims, supported by factual averments by the S.E.C., neither admitted nor denied by the wrongdoer, will suffice to allow the district court to conduct its review. Other cases may require more of a showing, for example, if the district
As noted earlier, when a proposed consent decree contains injunctive relief, a district court must also consider the public interest in deciding whether to grant the injunction. See eBay, 547 U.S. at 391; Salinger v. Colting, 607 F.3d 68, 80 (2d Cir. 2010). eBay makes clear that
a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and
defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.
547 U.S. at 391. ”eBay strongly indicates that the traditional principles of equity it employed are the presumptive standard for injunctions in any context,” be they preliminary or permanent. Salinger, 607 F.3d at 78; see also World Wide Polymers, Inc. v. Shinkong Synthetic Fibers Corp., 694 F.3d 155, 160-61 (2d Cir. 2012) (applying the eBay test to a permanent injunction sought to remedy a breach of an exclusive distributorship agreement).
Our analysis focuses on the issue reached by the district court: that the district court must assure itself the “public interest would not be disserved” by the issuance of a permanent injunction. eBay, 547 U.S. at 391; cf. WPIX, Inc. v. ivi, Inc., 691 F.3d 275, 278 (2d Cir. 2012) (describing the test as “non-disservice of the public interest by issuance of a preliminary injunction.“)1
The job of determining whether the proposed S.E.C. consent decree best serves the public interest, however, rests squarely with the S.E.C., and its
[F]ederal judges—who have no constituency—have a duty to respect legitimate policy choices made by those who do. The responsibilities for assessing the wisdom of such policy choices and resolving the struggle between competing views of the public interest are not judicial ones: “Our Constitution vests such responsibilities in the public branches.”
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 866 (1984) (quoting TVA v. Hill, 437 U.S. 153, 195 (1978)); see also In re Cuyahoga Equip. Corp., 980 F.2d 110, 118 (2d Cir. 1992) (“Appellate courts ordinarily defer to the agency‘s expertise and the voluntary agreement of the parties in proposing the settlement.“).
The district court correctly recognized that it was required to consider the public interest in deciding whether to grant the injunctive relief in the proposed injunction. Citigroup I, 827 F. Supp. 2d at 331. However, the district court made no findings that the injunctive relief proposed in the consent decree would disserve the public interest, in part because it defined the public interest as “an overriding interest in knowing the truth.” Id. at 335. The district court‘s failure to make the proper inquiry constitutes legal error. On remand, the district court should consider whether the public interest would be disserved by entry of the
To the extent the district court withheld approval of the consent decree on the ground that it believed the S.E.C. failed to bring the proper charges against Citigroup, that constituted an abuse of discretion. See Citigroup I, 827 F. Supp. 2d at 330. In comparing the complaint filed by the S.E.C. against Citigroup with the complaint filed by the S.E.C. against Stoker, the district court noted that “[a]lthough this would appear to be tantamount to an allegation of knowing and fraudulent intent (‘scienter,’ in the lingo of securities law), the S.E.C., for reasons of its own, chose to charge Citigroup only with negligence, in violation of
Finally, we note that to the extent that the S.E.C. does not wish to engage with the courts, it is free to eschew the involvement of the courts and employ its own arsenal of remedies instead. See, e.g.,
CONCLUSION
For the reasons given above, we vacate the November 28, 2011 order of the district court and remand this case for further proceedings in accordance with this opinion. As we exercise jurisdiction pursuant to
I thank my panel colleagues for addressing many of my concerns in this case. In particular, today‘s majority opinion makes clear that district courts assessing a proposed consent decree should consider principally four factors: “(1) the basic legality of the decree; (2) whether the terms of the decree, including its enforcement mechanism, are clear; (3) whether the consent decree reflects a resolution of the actual claims in the complaint; and (4) whether the consent decree is tainted by improper collusion or corruption of some kind.” Majority Op., ante, at 20-21 (citations omitted). I write separately to make two more observations.
First, in my view, the “fair and reasonable” standard for assessing the appropriateness of monetary relief (as opposed to injunctive relief) involves a straightforward analysis of only the four factors identified by the majority and described above. If all four factors are satisfied, the perceived modesty of monetary penalties proposed in a consent decree is not a reason to reject the decree.
Second, I would be inclined to reverse on the factual record before us and direct the District Court to enter the consent decree. It does not appear that any additional facts are needed to determine that the proposed decree is “fair and reasonable” and does not disserve the public interest. Nor, to use