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From Securities Regulation Daily, June 19, 2014

Court approves consent judgments in light of 2nd Circuit Citigroup decision

By Rodney F. Tonkovic, J.D.

In the wake of the Second Circuit's recent decision regarding review of consent judgments, a district court has approved a consent judgment in an SEC enforcement action. Approval of the judgment had previously been conditioned upon the Second Circuit's decision in SEC v. Citigroup Global Markets, Inc.(Citigroup). The court concluded that the holding in Citigroup controlled the disposition of this action and compelled its approval of the proposed consent judgments at issue (SEC v. CR Intrinsic Investors, LLC, June 18, 2014, Marrero, V.).

Background. The Commission brought this action against CR Intrinsic Investors, LLC (CR Intrinsic), an unregistered investment adviser, alleging violations of the antifraud provisions of the securities laws. According to the Commission, CR Intrinsic participated in an insider trading scheme that resulted in hedge fund portfolios managed by it and S.A.C. Capital Advisors, LLC generating approximately $275 million in illegal profits or avoided losses.

At the same time, the SEC submitted for the court’s approval a final judgment providing for consent to the judgment and for an injunction against future violations of the securities laws, disgorgement, and civil penalties. The proposed consent judgments also indicated that the defendants consented to the judgment “without admitting or denying the allegations of the Complaint.” In the previous opinion in this case (covered in the Securities Regulation Daily Wrap Up for April 17, 2013), the court found that the injunctive and monetary relief was fair, reasonable, and adequate. However, the court said that it was troubled by the “neither admit nor deny” provisions in the context of this "extraordinary" litigation, but concluded that the most prudent course would be to approve the settlement subject to the condition that it become final upon the Second Circuit’s ruling. The court also noted then-pending criminal proceedings and an unresolved parallel civil proceeding.

Citigroup. The Second Circuit decided Citigroup on June 4, 2014. In Citigroup, the appellate court held that the proper standard for reviewing a proposed consent judgment settling an SEC enforcement action requires the district court to "determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the public interest would not be disserved in the event that the consent decree includes injunctive relief." The adequacy of the settlement is no longer a consideration. The district court is required to enter the order unless there is a "substantial basis" to conclude that the proposed decree does not meet these requirements.

Following Citigroup the parties in this case renewed their request for approval of the proposed consent judgments. Post-Citigroup, the parties argued, a court cannot refuse to approve a consent judgment merely because the defendant neither admits nor denies the allegations in the complaint. Because the court found that the proposed judgments were otherwise fair and reasonable, the parties argued, the court was now required to approve the judgments.

"Fair and reasonable." The court was persuaded that the proposed consent judgments were fair and reasonable under the Citigroup factors. The judgments: were legal and clear; resolved the claims in the complaint; and there was no suggestion of collusion or corruption. The court accordingly reaffirmed its earlier finding that the judgments were fair and reasonable and concluded that it was required to approve them.

In approving the judgments, the court noted the changed circumstances since it issued its conditional approval in April 2013. First, the pending criminal trial of CR Intrinsic employee Mathew Martoma resulted in his conviction on three counts of insider trading. Related criminal and civil forfeiture proceeds brought by the government against CT Intrinsic and S.A.C. Capital were also resolved in a global disposition in which CR Intrinsic and the codefendants pleaded guilty to securities fraud and wire fraud, admitted to the forfeiture allegations, and agreed to surrender $1.8 billion in fines and forfeiture.

The court noted that, as a matter of policy, the delay between the filing of the proposed judgments and this decision served a purpose. The intervening criminal matters, the court explained, "called attention to the importance of more rigorous inquiry by the SEC in its application of 'neither admit nor deny' provisions'" especially when parallel criminal proceedings track an SEC complaint arising from the same facts. The court observed that "there may be value in a wait-and-see approach" because "the outcome of a strong criminal case could strengthen the administrative agency's hand in achieving a settlement more favorable to the public good and the interests of justice."

The case is No. 12-cv-8466.

Attorneys: Amelia Anne Cottrell for the SEC. Daniel Prugh Roeser (Goodwin Procter LLP) for Mathew Martoma.

Companies: CR Intrinsic Investors, LLC; S.A.C. Capital Advisors, LLC

MainStory: TopStory FraudManipulation NewYorkNews

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