Here’s the good news for Manhattan federal district court judge Jed Rakoff: The U.S. Court of Appeals for the Second Circuit is taking the unusual step of appointing a lawyer to advocate for upholding the judge’s explosive decision rejecting the Securities and Exchange Commission’s $285 million settlement with Citigroup. The bad news? That lawyer has a “strong likelihood” of losing, according to a 17-page ruling the appellate court handed down Thursday.
The unsigned opinion fairly drips with skepticism about Judge Rakoff’s reasoning for rejecting the settlement in November, largely because he found it wasn’t in the public interest and Citigroup admitted to nothing in making the deal. The appellate court won’t decide whether to reverse Judge Rakoff until hearing arguments in the SEC’s appeal, but the three-judge panel agreed to stay the district court proceedings after finding “several problems” with the opinion and suggesting it may be thrown out. (Click here for more on Thursday’s ruling from the New York Law Journal.)
“While we are not certain we would go so far as to hold that under no circumstances may courts review an agency decision to settle, the scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal,” wrote the Second Circuit panel, which included Circuit Judges John Walker Jr., Pierre Leval, and Rosemary Pooler. The appellate judges homed in on Judge Rakoff’s objection to Citi’s refusal to admit or deny any guilt or liability as part of the proposed settlement, finding that Rakoff “does not appear to have given deference to the SEC’s judgment on wholly discretionary matters of policy.”
The court ordered Second Circuit clerk Catherine O’Hagan Wolfe to appoint counsel to argue in support of Judge Rakoff’s ruling. Wolfe told us Thursday that the panel’s decision to appoint pro bono counsel isn’t that uncommon and that she’s made three such appointments already this year. Wolfe declined to say who she was likely to choose, but she did say she often picks from a roster and that certain lawyers “come to mind” for different types of cases.
SEC enforcement chief Robert Khuzami praised the Second Circuit’s decision in a statement. Citigroup, represented by Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison, said in a statement that it was “pleased with the Second Circuit’s ruling.”
As we’ve reported, Judge Rakoff’s decision in the Citi case inspired other judges to begin questioning settlements with government regulators more aggressively. Most recently, Camden, N.J., federal district court judge Renée Marie Bumb echoed Rakoff and heavily cited his November ruling in questioning whether a proposed $11.5 million settlement between the Federal Trade Commission and a company called Circa Direct LLC was “fair, adequate, reasonable, and in the public interest.” (Circa Direct allegedly advertised bogus weight-loss products through fake news Web sites.)
On Wednesday, the FTC responded to Judge Bumb. The agency asserts that that while Judge Rakoff’s ruling could be read as requiring admissions before a court approves a settlement, “such a requirement would be contrary to well-settled law.” Lawyers for Circa Direct at Venable likewise urged Judge Bumb to approve the settlement in a letter Wednesday. “The proposed settlement is in the public interest and the product of arms-length negotiations by both parties and has been approved by the Federal Trade Commission,” wrote Venable partner Edwin Larkin.
Larkin did not respond to a request for comment.
