Opinion

Alison Frankel

The Stoker verdict and Citi’s settlement with the SEC

Alison Frankel
Aug 2, 2012 15:10 UTC

If you’re the Securities and Exchange Commission, it’s tough to find a silver lining in Tuesday’s jury verdict for Brian Stoker, a onetime midlevel banker at Citigroup. Not only did the eight jurors in federal court in Manhattan determine that Stoker was not liable for misleading investors in a $1 billion collateralized debt obligation, they also offered a backhanded slap at the SEC. “This verdict should not deter the SEC from continuing to investigate the financial industry, to review current regulations, and modify existing regulations as necessary,” the jury said in a highly unusual note accompanying the verdict. For the SEC, which has been roundly criticized for its failure to bring civil charges against executives implicated in the financial crisis, the jury’s note has to read like one more reminder that the public is still waiting for corporate accountability.

But, ironically, the verdict could improve the odds of a 2nd Circuit Court of Appeals ruling that U.S. Senior District Judge Jed Rakoff improperly rejected the SEC’s $285 million settlement with Citi in the agency’s parallel suit against the bank.

As you probably recall, the appeals court has already expressed considerable skepticism about Rakoff’s decision last November to reject the settlement. At the time, Rakoff said he had the right to determine whether the deal was in the public interest. And it wasn’t, he said, because Citi hadn’t acknowledged wrongdoing and was paying what amounted to “pocket change” to make the SEC case go away. The truth matters, Rakoff said in his opinion, and for all he and the public knew, the truth of this case could be that Citi hadn’t actually done anything wrong. For good measure, Rakoff ruled in December that the SEC must proceed with its case even though the agency and Citi filed a joint appeal of his November ruling to the 2nd Circuit.

In March a three-judge panel of the 2nd Circuit reversed Rakoff on the issue of a stay, in a ruling that sent a strong message that he’s wrong on the merits as well. The appellate court said that the SEC – and not a federal judge – has the right to determine whether its settlements serve the public interest. Unless the deal is demonstrably an abuse of the SEC’s discretion, the panel said, the agency is owed deference by the courts. The opinion also quibbled with Rakoff’s call for an end to the SEC’s policy of permitting settlements without requiring an admission from defendants and said he was plain wrong to worry that the deal somehow victimized Citi. The appeals panel concluded that when a separate panel considers the merits of the joint appeal, the SEC and Citi are likely to prevail.

That underlying appeal will be heard at the end of September, with John “Rusty” Wing of Lankler Siffert & Wohl representing Rakoff, who also presided over Stoker’s trial. It’s not clear whether the SEC or Citi will discuss the Stoker verdict at the 2nd Circuit argument. SEC enforcement director Robert Khuzami and Citi lead counsel Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison both declined to comment.

Shareholder spring? Not so much, new study says

Alison Frankel
Jun 8, 2012 15:42 UTC

After Citigroup shareholders voted against a board-approved $15 million pay package for CEO Vikram Pandit in April, there was a lot of talk about a shareholder spring, with speculation that shareholders at a lot of other companies would seize the opportunity of advisory say-on-pay votes to express irritation with unresponsive boards. But according to a study by Davis Polk & Wardwell that was published on Thursday at the Harvard Corporate Governance and Financial Regulation Forum, shareholders have been slower to storm the barricades than the Citi vote suggested. “The proxy season,” said the study’s lead author, Richard Sandler, “hasn’t been as exciting as people thought it might be.”

According to Davis Polk, only about 2 percent of the 639 large companies to report proxy results as of May 18 failed say-on-pay votes, about the same percentage as in 2011. (A June 6 study by Semler Brossy of say-on-pay votes in the Russell 3000 found 40 of 1,594 corporations, or 2.5 percent, have failed so far this year.) Ninety percent of the large companies won at least 70 percent approval from shareholders in say-on-pay votes, according to the Davis Polk report. “The Citi rejection was embarrassing and awkward, but it hasn’t resulted in a large number of embarrassing outcomes for other companies,” Sandler said.

Nor have shareholders had much luck with proxy access proposals, according to Davis Polk. Only nine proposals made it to ballot this year. There have been three reported votes, and none of the proposals has garnered more than 33 percent approval. Where shareholders have succeeded, according to the Davis Polk report, is in forcing companies to offer shareholders a vote on getting rid of staggered boards or on auditor independence. And when shareholders vote on such proposals, the study found, they’re increasingly likely to support them.

Citi shareholders have slim chance of enforcing say-on-pay vote

Alison Frankel
Apr 19, 2012 13:57 UTC

As Reuters reported Tuesday in a piece on Citigroup shareholders voting against the $15 million board-approved pay package for CEO Vikram Pandit, investors appear to be increasingly skeptical of lavish pay for executives of corporations with underperforming stock. With companies entering the second proxy season in which shareholders can offer an advisory say on executive pay, compensation and proxy experts are predicting more votes against compensation packages than we saw in 2011, when 45 companies got a thumbs-down from shareholder in say-on-pay votes.

Such votes are strictly advisory. Dodd-Frank mandated that shareholders have a say on pay, but it didn’t require boards to do anything in response to their votes. Some boards took 2011 votes against approved compensation packages to heart; according to a Feb. 21 Wall Street Journal story, a lot of the companies that failed say-on-pay votes hired new compensation advisers and improved communications with shareholders. The Journal also noted that a quarter of the companies that failed shareholder votes got new CEOs in 2011, a turnover rate that’s twice as high as overall corporate rates. (It’s not clear whether that’s because the execs figured they could do better elsewhere or boards interpreted say-on-pay rejections as a no-confidence vote on management.)

But what happens if corporate boards simply ignore shareholder say-on-pay votes? Based on the results of the first year of say-on-pay litigation, not much.

In powerful Citi ruling, 2nd Circuit stresses deference to SEC

Alison Frankel
Mar 16, 2012 14:17 UTC

When U.S. Senior District Judge Jed Rakoff rejected a $285 million settlement between Citigroup and the Securities and Exchange Commission last fall, he offered a stern rebuke to SEC lawyers who’d suggested his role was not to protect the public interest. “A court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest,” Rakoff wrote in his oft-quoted ruling. “Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensible attribute of the federal judiciary.”

In the months since, at least three other federal judges have cited Rakoff in questioning whether settlements proposed by federal agencies serve the public interest, two in SEC cases and one in a Federal Trade Commission case. The SEC adopted a minor, mostly cosmetic revision in the policy that so provoked Rakoff — in which defendants are permitted to settle without admitting liability — but otherwise insisted that such compromises are the very foundation of federal enforcement efforts.

On Thursday, the agency’s position received a very powerful endorsement from the 2nd Circuit Court of Appeals. A three-judge panel ruled that the SEC’s case should be stayed pending a joint appeal of Rakoff’s ruling by the agency and Citigroup, overturning a Rakoff order that the case proceed. The extraordinary 17-page appellate ruling concludes that Citi and the SEC are likely to succeed in their argument that Rakoff was wrong to reject the settlement.

Chief judge: Rakoff assignment to Citi case was ‘totally random’

Alison Frankel
Nov 30, 2011 16:30 UTC

If there’s one federal jurist the Securities and Exchange Commission absolutely, positively did not want to see at the top of the docket in its $285 million settlement with Citigroup, it was Senior Judge Jed Rakoff of Manhattan federal court. Rakoff has been a festering sore for the agency since 2009, when he rejected a proposed $33 million settlement with Bank of America over failing to disclose bonus payments to Merrill Lynch executives in merger-related documents. In a March 2011 opinion in the Vitesse Semiconductor case, Rakoff took the agency to task for agreeing to settlements in which defendants neither admit nor deny wrongdoing. Then in July he claimed jurisdiction over the SEC’s case against former Goldman Sachs director Rajit Gupta, accusing the agency of forum shopping in filing an administrative action against Gupta. You can only imagine the teeth-gnashing at the SEC when Rakoff was assigned the Citi case. After the SEC tried to argue that Rakoff doesn’t have the power to consider the public interest in his evaluation of the proposed settlement, Monday’s rejection of the settlement was practically a foregone conclusion.

So you may be wondering — as I was — how it is that Rakoff ended up with the Citi case. The answer, according to his chambers and Chief Judge Loretta Preska of the Southern District, is that the assignment was purely random. Yes, there are 41 federal district judges in the district, so the odds of any of them overseeing multiple, unrelated cases filed by the same plaintiff are long. But according to Preska and Rakoff’s chambers, that’s what happened here.

The SEC filed the Citigroup case in federal court in Manhattan, rather than Washington, D.C. (where it filed a $75 million settlement with Citi in 2010) because the new Citi case includes SEC charges against Brian Stoker, a Citi Global Markets employee who allegedly structured and marketed the CDO that’s at the bottom of the case. Unlike the two Citi employees in the 2010 case, Stoker refused to settle with the agency. So in anticipation of litigation with him, the agency filed the entire Citi case in New York.

Rakoff to SEC: Oh yes, it is my job to consider public interest

Alison Frankel
Nov 29, 2011 00:34 UTC

In 2010, when the Securities and Exchange Commission brought a case against Citigroup for misleading investors about the bank’s exposure to subprime mortgages, the SEC filed the proposed $75 million settlement in Washington, D.C., federal court. Judge Ellen Huvelle gave the agency some gruff about the deal, in which two individual Citi defendants also settled SEC claims through an administrative action, but she eventually accepted the settlement without demanding any big changes.

The SEC and Citi must be looking back with regret at those halcyon days. For reasons the agency has not explained, when it filed a proposed $285 million settlement with Citi last month, it opted for the federal court not in D.C. but in Manhattan. There, the case — which involves claims that Citi defrauded investors in a mortgage-backed CDO — was randomly assigned to U.S. District Judge Jed Rakoff, who has recently been engaged in a highly-publicized campaign of insisting on corporate accountability in SEC settlements. The SEC proceeded to undermine its credibility in Rakoff’s court by arguing, as my colleague Erin Geiger Smith reported, that it’s not the judge’s role to consider the public interest in SEC settlements.

In a 15-page, eminently quotable exercise in rhetoric issued Monday, Rakoff pushed the agency into the grave it dug for itself, rejecting not only the proposed settlement but also the SEC’s assertion that he must heed its assessment of the public interest. “A court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest,” Rakoff wrote. “Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensible attribute of the federal judiciary.”

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