The Securities and Exchange Commission's
Director of the Division of Enforcement, Robert Khuzami, today made the
following statement on the Citigroup case:
Last month, a federal district court declined to approve a consent judgment
because, in its view, the underlying allegations were 'unsupported by any
proven or acknowledged facts.' As a result, the court rejected a $285
million settlement between the SEC and Citigroup that reasonably reflected
the relief the SEC would likely have obtained if it prevailed at trial.
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. For this reason, today we
filed papers seeking review of the decision in the U.S. Court of Appeals for
the Second Circuit.
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.
For example, in the cases that the SEC identifies as core financial crisis
cases, we filed unsettled actions against 40 of the 55 (70 percent) of the
individuals charged - including the action filed against Brian Stoker in
this matter. Similarly, we filed unsettled actions against 11 of the 26 (42
percent) of the entities we charged - eight of which we did not litigate
against because they were bankrupt, defunct or no longer operating.
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