S.E.C to Appeal Rejection of Citigroup Settlement

In a filing in Federal District Court in New York, the commission said it would ask the United States Court of Appeals for the Second Circuit to overturn a decision by Judge Jed S. Rakoff. In the decision, the judge rejected an agreement for Citigroup to pay $285 million and accept an injunction against future violations of the antifraud clauses of federal securities laws.

Judge Rakoff ruled in November that the proposed settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest,” in part because Citigroup was allowed to neither admit nor deny the charges. Judge Rakoff said that without an admission or evidence that Citigroup had violated the law, he had no way to determine whether the settlement was adequate.

The appeal carries significant risk for the S.E.C. because if the ruling were upheld by the appeals court, it would set a precedent that would be likely to influence judges hearing similar cases.

The Second Circuit court, located in New York, hears many cases involving financial issues and securities laws. While its decisions are not binding on other circuits, they often influence judges around the country, securities law experts say.

Citigroup was charged by the S.E.C. with fraud for selling a $1 billion fund in 2006 and 2007 that invested in mortgage-related securities without telling investors that the bank was betting against many of the securities in the portfolio.

Judge Rakoff ordered the S.E.C. and Citigroup to prepare for a trial to begin in July.

At the time of Judge Rakoff’s decision, Robert Khuzami, the S.E.C.’s director of enforcement, said that the Citigroup settlement “reasonably reflects the scope of relief that would be obtained after a successful trial,” and that the judge’s decision “ignores decades of established practice throughout federal agencies and decisions of the federal courts.”

The S.E.C. has long contended that it must settle most cases rather than take them to trial because its limited resources cannot afford much litigation. In addition, the commission says it frequently achieves in its settlements much the same result that it could hope to obtain in court, without enduring the expense of a trial.

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