SEC-Citigroup trial delayed as appeals court reviews accord

March 16 (Bloomberg) -- The U.S. Securities and Exchange Commission and Citigroup Inc. won a delay in the trial of a lawsuit the agency brought against the bank while an appeals court considers a judge’s refusal to approve their $285 million settlement.

“The SEC and Citigroup have made a strong showing of likelihood of success in setting aside the district court’s rejection of their settlement,” the U.S. Court of Appeal in Manhattan wrote yesterday.

In November, U.S. District Judge Jed Rakoff declined to approve the accord resolving claims that New York-based Citigroup, the third-biggest U.S. bank, misled investors in a $1 billion financial product linked to risky mortgages. He ordered them to go to trial, which was scheduled for July 16.

In his decision, Rakoff criticized the agency’s practice of settling without requiring the subject of the allegations to admit wrongdoing, and said the proposed pact was “neither fair, nor reasonable, nor adequate, nor in the public interest.” The agreement didn’t provide him with “any proven or admitted facts” to inform his judgment, he said.

A clerk for Rakoff said the judge is prohibited by law from commenting on pending cases. Danielle Romero-Apsilos, a Citigroup spokeswoman, said the company was pleased with the appeals court’s ruling.

‘Preserves Resources’

“We agree to settlements when the terms reflect what we reasonably believe we could obtain if we prevailed at trial, without the risk of delay and uncertainty that comes with litigation,” Robert Khuzami, director of the SEC’s enforcement division, said in a statement yesterday. “This settlement approach preserves resources that we can use to stop other frauds and protect other victims.”

In December, the appeals court halted the lower-court proceedings until it made the ruling it did yesterday.

The appeals court said yesterday that while it found likelihood of success on the appeal for the purposes of halting the lower-court proceedings, that didn’t mean the panel that hears the merits of the case will do so.

“We continue to believe Judge Rakoff got it right in rejecting this settlement and are confident that the circuit court, when it hears the case on the merits, will conclude that the SEC and settling parties must present significantly more information to evaluate a proposed settlement,” Dennis Kelleher, chief executive officer of Washington-based Better Markets, which seeks to improve financial-market transparency, said in an e-mail.

Policy Decisions

The three-judge panel said the case raises questions about responsibilities allocated between the federal government’s executive and judicial branches and the deference a judge must give to an agency’s policy decisions.

Rakoff’s complaint that the bank didn’t admit liability “prejudges the fact that Citigroup had in fact misled investors” and assumes the SEC would prove that at a trial, the court wrote.

“We know of no precedent that supports the proposition that a settlement will not be found to be fair, adequate, reasonable, or in the public interest unless liability has been conceded or proved,” it said.

Many factors come into deciding whether to go to trial, including the likelihood of getting a better deal in a settlement and the expense of a trial, the court said.

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