NEW YORK — A federal appeals court has raised concerns about a lower court's decision last year to reject a $285 million civil settlement between the U.S. Securities and Exchange Commission and Citigroup Inc.
The U.S. Second Circuit Court of Appeals said on Thursday said that was delaying a civil fraud trial expected to begin in July. The court said the case "raises important questions" and it would determine whether the judge overstepped his authority in rejecting the deal.
Last year, a district judge rejected the settlement, in part because he objected to a decades-old practice by the SEC in which Citigroup was allowed to neither admit nor deny wrongdoing as part of the deal.
The judge appeared to assume that the SEC had "had a readily available option to obtain a judgment that established Citigroup's liability, either by trial or settlement, but chose for no good reason to settle for less," the appeals court said.
"A still more significant problem is that the court does not appear to have given deference to the SEC's judgment on wholly discretionary matters of policy," the appeals court said.
"The district court believed it was a bad policy, which disserved the public interest, for the SEC to allow Citigroup to settle on terms that did not establish its liability. It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies."
In a sharply worded order in November, U.S. District Judge Jed S. Rakoff rejected the deal to settle civil fraud charges against Citigroup, saying the pact was "neither fair, nor reasonable, nor adequate, nor in the public interest."
The judge has been a vocal critic of the SEC's approach in settlements in the past. He called the $95 million penalty in the Citi case "pocket change" for a firm its size.
The SEC had accused the New York company of selling investors slices of a $1 billion mortgage-bond deal called Class V Funding III, without disclosing it was betting against $500 million of those assets.
In its order Thursday, the appeals panel said that Citigroup and the SEC have "made a strong showing of likelihood of success in setting aside the district court's rejection of their settlement" and that they may suffer "serious, perhaps irreparable, harm" as a result — both important legal standards for granting a stay.
"We are pleased with the Second Circuit's ruling," a Citigroup spokeswoman said.
In a sign of how unusual the litigation is, the appeals court said that lawyer would be appointed to argue "in support of the district court's position" because the SEC and Citigroup are united in seeking a stay.
"We are pleased that the appeals court found 'no reason to doubt' the SEC's view that the settlement ordering Citigroup to return $285 million to harmed investors and adopt business reforms is in the public interest," said Robert Khuzami, director of the SEC's Division of Enforcement. "As we have said consistently, we agree to settlements when the terms reflect what we reasonably believe we could obtain if we prevailed at trial, without the risk of delay and uncertainty that comes with litigation. Equally important, this settlement approach preserves resources that we can use to stop other frauds and protect other victims."
