SEC v. Citigroup Global Markets

752 F.3d 285 (2014)

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Nature of the Case

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Facts

P filed a complaint against D, alleging that D negligently misrepresented its role and economic interest in structuring and marketing a billion-dollar fund, known as the Class V Funding III, and violated Sections 17(a)(2) and (3) of the Securities Act of 1933. It is alleged that D 'exercised significant influence' over the selection of $500 million worth of the Fund's assets, which were primarily collateralized by subprime securities tied to the already faltering U.S. housing market. D led everyone to believe that the Fund's investment portfolio was chosen by an independent investment advisor. P alleged that D selected a substantial amount of negatively projected mortgage-backed assets in which d had taken a short position. By being short, D realized profits of roughly $160 million from the poor performance of its chosen assets, while Fund investors suffered millions of dollars in losses. Almost immediately after filing of the complaint, P filed a proposed consent judgment. D agreed to: (1) a permanent injunction barring D from violating Act Sections 17(a)(2) and (3); (2) disgorgement of $160 million, which the S.E.C. asserted were D's net profits gained as a result of the conduct alleged in the complaint; (3) prejudgment interest in the amount of $30 million; and (4) a civil penalty of $95 million. D consented to make internal changes, for a period of three years, to prevent similar acts from happening in the future. There was no admission of guilt or liability. The district court demanded, for all intents and purposes, that the decree cannot be valid if D neither admits nor denies wrongdoing? The rest of the court's questions centered around the substance of the consent judgment. It asked the following questions. Given the P's statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether P'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 P do to maintain compliance? How many contempt proceedings against large financial entities has P 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 P. 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? P and D answered the court. The court declined to approve the consent judgment. The court stated that it must 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. It ruled that the consent decree was inadequate because it did not include a factual basis for the truth of the claims in the complaint. P and D appealed.