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Update on the New York litigation and regulatory landscape

In the last few months, several financial institutions have paid very large sums to resolve regulatory claims brought by various U.S. federal and state regulators arising from, among other things, claims of sanctions violations, money laundering and LIBOR manipulation. During the first quarter of 2013, the Second Circuit Court of Appeals will confront the question of what limitations apply to a regulated entity’s ability to reach a settlement with its regulators, and what role the federal courts should play in approving such settlements.

This issue was presented recently in the context of a district judge’s refusal to approve, at least in its current form, a settlement between the SEC and IBM arising from alleged violations of the Foreign Corrupt Practices Act, with the judge referring to a growing awareness among federal judges of the need for more rigorous reviews of corporate settlement agreements. Or, as the judge reportedly put it more directly at the hearing, “I’m not just going to roll over like the SEC has.”

The Second Circuit appeal arises from a district judge’s refusal to approve a settlement between the SEC and Citigroup of claims relating to Citigroup’s CDO business, which comprised a monetary payment, injunction against future violations of the securities laws and the implementation of certain remedial procedures. The core of the court’s objection was that the settlement – like most SEC institutional settlements – was made on the basis that Citigroup neither admitted nor denied liability.

The judge considered that the absence of an evidentiary record prevented him from evaluating whether the settlement was adequate or in the public interest. As the judge put it pointedly, he found it difficult to see what the SEC was getting from the settlement, other than a “quick headline”. He also expressed concern that settlements approved without a factual record do not benefit defrauded investors, who derive no collateral estoppel benefit, and have the potential to be unfair to the regulated entity (although the judge also characterised the agreed-upon USD 285 million settlement payment as “pocket change”).

In March 2012, at the joint request of the SEC and Citigroup, the Second Circuit stayed the trial court proceedings, ruling that the parties had shown a substantial likelihood that they would succeed in overturning the district court’s ruling on appeal. Argument on that appeal is scheduled for February 8 2013, and many are waiting with interest to see what the appellate court will have to say about the proper allocation of responsibilities between the regulator and the courts when it comes to deciding what is a fair and adequate settlement.

Contributed by Andrew Rhys Davies.

as the judge reportedly put it more directly at the hearing, I'm not just going to roll over like the SEC has'

Legal and Regulatory Risk Note
United States