Judge Calls Foul on SEC in Citigroup Case

     MANHATTAN (CN) – A federal judge accused the U.S. Securities and Exchange Commission of “misleading” him and the 2nd Circuit to stop a trial against Citigroup for massive securities fraud.



     The SEC sued Citigroup in October for selling $1 billion in mortgage-backed CDOs while secretly shorting the securities, which one Citigroup trader allegedly called “a collection of dogsh!t.”
     Shortly after filing, the parties agreed to settle for $285 million, with $95 million going to the victims.
     But U.S. District Judge Jed Rakoff refused to sign off on the deal, blasting the SEC in a blistering ruling for letting the megabank settle for “pocket change” without admitting wrongdoing.
     He ordered both parties to start discovery and set a trial date for July 16, 2012.
     Arguing that the ruling was based on a “legal error,” the SEC asked Rakoff to stay the trial until the appeal could pass. The SEC later made the same request in an emergency motion to the 2nd Circuit, but Rakoff says he was not notified.
     Rakoff refused to stay the trial on Tuesday afternoon, “totally unaware” that the 2nd Circuit granted the stay literally a minute earlier.
     In a five-page brief Thursday, Rakoff said the SEC duped him and the appellate panel to win the stay.
     Rakoff says the SEC originally asked him to consider a motion for a stay on Dec. 30, but he independently decided to expedite the request and worked straight through Christmas weekend to deliver his ruling on the first business day after the holiday, Dec. 27.
     That day, the SEC surreptitiously filed an “emergency motion” with the 2nd Circuit, allegedly telling the appellate court that the parties could not wait for the ruling Rakoff expedited.
     “As the reason for proceeding on an emergency basis, the SEC stated that Citigroup had only until January 3, 2012 to answer or move to dismiss the underlying complaint, and that ‘[i]f Citigroup files its answer, denying some or all of the allegations in the complaint, or if Citigroup moves to dismiss, challenging the complaint’s legal sufficiency, it will disrupt a central negotiated provision of the consent judgment pursuant to which Citigroup agreed not to deny the allegations in the complaint,'” the brief states.
     Rakoff said that the motion was “materially misleading in at least four respects.”
     “First, as a legal matter, a motion to dismiss (unlike an answer) does not constitute either an admission or denial; it is a legal challenge to the face of the complaint,” Rakoff wrote. “Second, as a factual matter, the SEC was either already aware that Citigroup was planning to move to dismiss rather than to answer … or could have readily found this out by calling counsel for Citigroup. Third, nowhere in the parties’ underlying papers to this court seeking a stay had the parties argued that January 3rd was a critical or even material date. Fourth, in light of the fact that this court’s position was not before the Court of Appeals, the SEC was under a professional obligation to bring to the attention of the Court of Appeals the fact that the Supreme Court of the United States had previously ruled that the denial of the fruits of a settlement does not, without more, provide a basis for interlocutory appeal, let alone a stay.”
     That afternoon, the SEC and Citigroup allegedly told Rakoff a different story than it told the appellate court earlier that day.
     “There appears to have been a similar misleading of this court,” Rakoff wrote.
     “Specifically, at around 3:30 pm on December 27th, the parties jointly called this court to present Citigroup’s application for additional pages for its motion to dismiss to be filed on January 3rd (an application this court granted). At no point in that conversation did the parties reveal that the SEC had moved a few hours earlier in the Court of Appeals for an emergency stay or that the ’emergency’ purportedly related to the January 3rd filing date.”
     Less than an hour later, the district and appellate courts got their signals crossed.
     “At approximately 4:20 pm, the Court of Appeals granted the SEC’s request for a temporary stay until January 17, 2012, when a motions panel of the Court of Appeals will consider the motion for a stay,” Rakoff wrote. “Virtually simultaneously, at 4:21 pm, this court, totally unaware of any of the filings in the Court of Appeals, issued its Memorandum Order denying the stay. The Court of Appeals therefore rendered its decision without having received this court’s memorandum order and having before it only the materially misleading papers of the SEC. Likewise, both parties, by failing to notify this court of the SEC’s emergency motion in the Court of Appeals even while holding a telephone conference with this court on the afternoon of December 27 to discuss Citigroup’s proposed request for an extension of page limits on the January 3rd motion to dismiss, thereby held back from this court material information it needed to do its job.”
     Rakoff said he wants to set the record straight with the 2nd Circuit and that the parties must be transparent with him in the future.
     “Accordingly, the court is filing this supplemental order, both to make the Court of Appeals aware of this background and to attempt to prevent similar recurrences,” he wrote. “Specifically, the parties are hereby ordered to promptly notify this court of any filings in the Court of Appeals by faxing copies of any such filings to this court immediately after they are filed in the Court of Appeals. In addition, this court will send a copy of this supplemental order, as well as the memorandum order that it supplements, to the Court of Appeals with a request that they be furnished to the motions panel hearing the stay motion on January 17, 2012.”

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