More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
A federal appeals court said Thursday that a judge likely overstepped his authority when he blocked a $285 million settlement over toxic mortgage securities after concluding that it was bad policy for a regulatory agency to accept a deal that does not include an admission of liability.
The 2nd U.S. Circuit Court of Appeals in Manhattan suspended the effect of Judge Jed Rakoff's decision to turn down the settlement between Citigroup and the Securities and Exchange Commission until it can fully study the case. It said there was a “strong likelihood" that Citigroup and the SEC would succeed in overturning Rakoff's ruling.
In doing so, a three-judge appeals panel noted that Rakoff believed it disserved the public interest for the SEC to let Citigroup settle without admitting liability.
"It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies," the 2nd Circuit ruling said. "While we are not certain we would go so far as to hold that under no circumstances may courts review an agency decision to settle, the scope of a court's authority to second-guess an agency's discretionary and policy-based decision to settle is at best minimal."
The appeals court said its preliminary review of facts involved in the settlement lead it to "see no basis to doubt" that the SEC properly considered numerous factors before reaching settlement including the value of the deal, the likelihood of reaching a better settlement, the risks of proceeding to trial and the public interest.
"In short, we conclude it is doubtful whether the court gave the obligatory deference to the SEC's views in deciding that the settlement was not in the public interest," the 2nd Circuit said.
Rakoff in November found the deal inadequate and ordered a prompt trial. Both the SEC and Citigroup appealed.
The settlement came after the SEC had accused Citigroup of betting against a complex mortgage investment in 2007. It said the firm made $160 million in the process while investors lost millions.
Rakoff criticized the deal because it did not require Citigroup to admit wrongdoing.
The appeals court said the appeal raised important questions, including the division of responsibilities between the executive and the judicial branches as well as the deference a federal court must give to policy decisions of an executive administrative agency when the public interest is at stake.
Robert Khuzami, director of the SEC's division of enforcement, said the SEC was pleased with the ruling. "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."
Citigroup said in a statement that it was pleased with the ruling.
The 2nd Circuit took particular exception to Rakoff's insistence that the liability issue be addressed, noting that the judge concluded that it was bad policy for the deal to be reached without Citigroup's admission of liability because defrauded investors cannot use the judgment to establish Citigroup's liability in civil lawsuits.
The appeals panel said Rakoff's reasoning prejudges that Citigroup had in fact misled investors and assumes that the SEC would succeed at trial in proving Citigroup's liability. It said the judge's conclusion overlooks the possibilities that Citigroup might not consent to settle if it must admit liability, that the SEC might lose at trial and that Citigroup perhaps did not mislead investors.
Copyright 2012 The Associated Press.