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Calling the court’s decision “incorrect” and in “legal error,” U.S. Securities and Exchange Commission Enforcement Division head Robert Khuzami announced that the agency is appealing a decision last month by Manhattan federal judge Jed Rakoff, who rejected the SEC’s proposed $285 million settlement with Citigroup Global Markets Inc. “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,” Khuzami said in a lengthy statement released by the SEC. “We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits.” In his Nov. 28 opinion, Rakoff objected to the proposed settlement’s boilerplate language in which Citigroup neither admitted nor denied wrongdoing. Such language is standard in SEC settlements, and is widely used by other federal agencies in legal proceedings as well. “The court has not been provided with any proven or admitted facts,” Rakoff wrote. “How can it ever be reasonable to impose substantial relief on the basis of mere allegations?” Instead, he demanded “cold, hard, solid facts, established either by admissions or trials.” Khuzami responded, “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 case involved wrongdoing in connection with a failed mortgage-backed securities fund. The U.S. Court of Appeals for the 2nd Circuit will hear the appeal. For the SEC, the danger is that the appellate court will uphold Rakoff’s decision, making it binding on all lower court judges in the circuit. If so, cases in the 2nd Circuit would be far more difficult for the SEC to settle. Companies generally insist on so-called “no admit-no deny” settlement terms to protect themselves from follow-on private litigation. Khuzami defended the benefits of such settlements, asserting that the $285 million “reasonably reflected the relief the SEC would likely have obtained if it prevailed at trial.” Settling the case “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,” he said. Rakoff also complained in his decision that the portion of the settlement that constituted the civil penalty, $95 million, was too low — “pocket change to any entity as large as Citigroup.” Khuzami responded that the penalties the SEC can recover are limited by law. “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,” he said. SEC Chairman Mary Schapiro has asked Congress to for authority to increase the maximum fines. Contact Jenna Greene at [email protected].

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