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The Securities and Exchange Commission on Tuesday was granted a two-week delay until mid-January in its securities fraud case against Citigroup as it seeks to have a judge's decision to toss its settlement with the bank reversed.
The agency has criticized the judge's decision, saying that it will subject it to undue hardship to have to bring such cases to trial, and is hoping to win an even longer delay so that it can pursue an expedited appeal of the ruling. The case centers around whether Citigorup misled investors in a $1 billion vehicle that involved risky mortgages.
As previously reported by AdvisorOne.com, Judge Jed S. Rakoff had rejected the SEC's arrangement with Citigroup, saying in his decision that because the SEC did not compel Citigroup to either admit or deny its allegations, it was impossible for him to determine whether the amount of the settlement, $285 million, was fair. He also criticized the amount as "pocket change" and said that the current policy of the SEC not to require an admission of wrongdoing created a substantial potential for abuse.
Reuters reported that the agency, in turn, has called Rakoff's decision a "legal error" that did not follow decades of precedent in court decisions allowing such settlements; the SEC further said that such decisions allowed investors to have faster recoveries and that the Rakoff ruling could affect the agency's ability to reach similar accords with other companies.
In its Tuesday morning filing with the 2nd U.S. Circuit Court of Appeals, the SEC said the urgency to put the case on hold came after Rakoff in a teleconference this month told Citigroup to answer the charges by Jan. 3, which is 27 days sooner than federal rules require. An answer could force Citigroup to deny some or all of the SEC allegations, or seek to have the case dismissed.
Further, the SEC said, such an action would cause the agency "irreparable harm" by forcing it to devote substantial resources to the case, and would "disrupt a central negotiated provision" in which Citigroup agreed not to deny the allegations.
Rakoff, in a ruling he made on Tuesday ruling denied the SEC's motion to halt the case pending its appeal to the 2nd Circuit, said it is "patently clear" there was no statutory basis to appeal his Nov. 28 ruling, and "derail the orderly conduct" of the case.
He added that this was because the appeal focused on his alleged error in demanding more facts about the case, rather than on the injunctive relief provided by the settlement. Not only that, he called the alleged harm to the SEC "largely illusory" since the agency is also pursuing a related case that arises from the same facts against a Citigroup employee, director Brian Stoker, who is contesting the regulator's charges.
The appeals court in New York said in its order on Tuesday afternoon, which was made public 78 seconds prior to the issuance of Rakoff's new ruling, that the case will be put on hold until a motions panel on Jan. begins considering the SEC's bid for a longer delay so it can pursue an expedited appeal.
Ironically, both the SEC and Citigroup were on the same side in seeking a delay; Citigroup spokeswoman Danielle Romero-Apsilos said again that the bank disagreed with Rakoff's Nov. 28 decision to disallow the settlement, and would have "substantial factual and legal defenses" at a trial.