Rakoff Ruling SEC Soft Settlement with Citigroup Fraud

8/3/2019 Rakoff Ruling SEC Soft Settlement with Citigroup Fraud

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORKU.S. SECURITIESCOMMISSION,

AND EXCHANGEx

11 Civ. 7387 (JSR)Pla in t i f f , OPINION AND ORDERv -

CITIGROUP GLOBAL MARKETS INC.,Defendant .

- - - - - - - - - - - - - xJED S. RAKOFF, U.S.D.J .

On October 19, 2011, the U.S. Secur i t i e s and Exchange Commission(the "S.E.C. U ) f i t h i s l awsui t , accusing defendant Cit igroupGlobal Markets Inc . ("Ci t igroup") of a s ubs t a n t i a l s e c u r i t f raud.According to the S.E .C . ' s Complaint , a f t e r Cit igroup rea l i zed in

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2007 t ha t the market fo r mortgage backed secu r i t i e s wasbeginning to weaken, t igroup crea ted a b i l l i o n - d o l l a r Fund (knownas "Class v Funding IIIU) t ha t al lowed it to dump some dubious asse t son misinformed inves to r s . This was accompl ished by Ci t ig roup ' smisrepresent ing t ha t the Fund 's asse t s were a t t r a c t i v e investmentsr igorous ly se lec t ed by an independent inves tment adv i se r , whereas infac t t igroup had arranged to inc lude in the por t fo l io a su b s t a n t i a lpercentage of nega t ive pro jec ted a s se t s and had then taken a shor tpos i t ion in those very asse t s it had helped s e l e c t . Complaint I ,2, 58. Having s t ruc tu red the Fund as a vehic fo r unloading

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dubious asse t s on unwi t t ing inves to r s , id . , 44, Cit igroup izednet pro f i t s of around $160 mil l ion , id . , 63 t whereas the inves to r sas the S.E.C. l a t e r revea led , l o s t more than $700 mil l ion . SeeS.E .C . ' s Memorandum of Law in Response to Quest ions Posed by theCourt Regarding Proposed Set t l ement ("SEC Mem.") a t 17 .

In a para l l e l Complaint f i l ed the same day aga ins t Cit igroupemployee Brian Stoker , see U.S. Se c u r i t i e s and Exchange Commission v.Brian H. Stoker , 11 Civ. 7388 (JSR) , the S.E.C. a l leged t h a tCi t igroup knew in advance t h a t it would be d i f f i c u l t to s e l l the Fundi f t igroup disc losed i t s ion to use it as a vehic to unload

hand-picked s e t o f nega t ive ly pro jec ted asse t s , see StokerComplaint 25. Spec i f i ca l ly , paragraph 25 of th e Stoker Complainta l leges ( in language some of which i s notably miss ing from theCi t igroup Complaint) tha t :

t igroup knew it would be d i f f i cu l t to p lace thel i a b i l i t i e s of [ the Fund] i f it d isc losed to inves to r si t s i n t en t ion to use the veh ic le to shor t a hand-pickeds e t of [poorly ra t ed asse ts ] .... By con t ras t ,Ci t igroup knew t ha t r ep resen t ing to inves to r s t ha t anexper ienced t h i rd - p a r t y inves tment adv ise r had se lec t edthe por t fo l io would f ac i l the placement of th e [Fund's]l i a b i l i t i e s . (emphasis supplied)

Although t h i s would appear to be tantamount to an a l l ega t ion ofknowing and f raudulent i n t e n t ( " sc ien te r , " in the l ingo of secu r i t i e slaw), the S.E.C. , fo r reasons of i t s own, chose to charge Cit igroup

Nothing in t h i s Opinion and Order has any bear ing on the case aga ins t Stoker ,which i s cur ren t ly scheduled to commence t r i a l on Ju ly 16, 2012.

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only with negl igence , in v io la t ion o f Sec t ions l7(a ) (2 ) and (3) ofthe Secur i t s Act, 15 U.S.C. 77q(a) (2 ) and (3) . Complaint 65.

Simultaneously with the f i l ing of i t s Complaint aga ins tCi t igroup, the S.E.C. presented to the Court fo r i t s s ignature a"Fina l Judgment As To Defendant t igroup Global Markets Inc ." ( the"Consent Judgmentlf), toge the r with a Consent of Defendant Cit igroupGlobal Markets Inc . (the "Consent") t ha t rec t h a t Cit igroupconsented to the en t ry of the Consent Judgment" [w]i thout admi t t ingo r denying the a l l ega t ions of the complaint .... " Consent 2. TheConsent Judgment (I) "permanently r e s t r a i n e d and enjoined" t igroupand i t s agents , employees, e t c . , from fu tu re v io la t ions of Sec t ionsl7(a ) (2) and (3) of the Secur i t i e s Act, ( I I ) requi red Ci t igroup todisgorge to the S.E.C. Ci t ig roup ' s $160 mil l ion in p r o f i t s , plus $30mil l ion in i n t e r e s t thereon, and to pay to th e S.E.C. a c i v i l pena l tyin th e amount of $95 mil l ion , and ( I I I ) requi red Ci t igroup tounder take fo r a per iod of t h ree years , sub jec t to enforcement by th eCourt , c e r t a in i n t e r na l measures designed to preven t recurrences ofthe t i e s fraud here perpe t r a ted .

Upon rece ip t of these submiss ions , the Court , by Order datedOctober 27, 2011, pu t some ques t ions to the pa r t i e s concerning theproposed Consent Judgment, to which the pa r t i e s responded both inwri t ing , see SEC Mem., supra , and Memorandum on Behalf of Ci t igroupGlobal Markets Inc . Support of the Proposed Fina l Judgment and

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Consent ("Ci t igroup Mem.")! and ora l ly ! see t r ansc r i p t of or a largument! 11/9/11 ("Tr. l l ) . Since then! th e Cour t has spen t longhours t ry ing to determine whether, in view of the su b s t a n t i a ldeference due the S.E.C. in mat te rs o f t h i s kind, th e Cour t cansomehow approve t h i s problematic Consent Judgment. In th e end, theCour t concludes t h a t cannot approve i t ! because the Court has no tbeen provided wi th any proven o r admi t ted f ac t s upon which toexerc ise even a modest degree of independent judgment.

The Cour t tu rns f t to the s tandard of review. In i t so r i g i n a l Memorandum in suppor t of the proposed Consent Judgment!f i l ed before the case had been ass igned to any judge, the S.E.C.express ly endorsed the s tandard of review s e t fo r th by t h i s Court ini t s Bank of America dec i s ions , i . e . ! "whether th e proposed ConsentJudgment ... i s f a i r ! reasonable! adequate , and in th e publin teres t . ! ! Memorandum By Pla in t i f f Secur i t s and ExchangeCommission in Suppor t of Proposed Set t l ement a t 5 (quot ing withapproval SEC v. Bank of America Corp.! 653 F. Supp. 2d 507! 508(S.D.N.Y. 2009) ("Bank of America Iff)) ; SEC v. Bank of

America Corp.! 2010 WL 624581! a t *6 (S.D.N.Y. Feb. 22, 2010) ("Bank) . This was also th e S.E.C. !s s ta ted pos i t ion in

another , in te rvening proceeding before t h i s Court , SEC v. VitesseSemiconductor Corp. , 77 1 F. Supp. 2d 304 (S.D.N.Y. 2010).

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In i t s most recen t f i l i ng in t h i s case , however, the S.E.C.pa r t l y reverses i t s previous pos i t ion and a s s e r t s t ha t , while theConsent Judgment must still be shown to be f a i r , adequate , andreasonable , " the publ ic i n t e r e s t ... i s no t pa r t of [the] appl icablestandard of j ud i c i a l review." SEC Mem. a t 4 n. 1. This i s er roneous .A la rge pa r t of what the S.E.C. reques ts , in t h i s and most o ther suchconsent judgments , i s in junc t ive r e l i e f , both broadly , in the reques tfo r an in junc t ion forbidding fu ture v i o l a t i o n s , and more narrowly , inthe reques t t ha t the Court enforce fu ture prophylac t ic measures(here, fo r a th ree -year pe r iod ) . The Supreme Court has repea tedly

made c lea r , however, t ha t a cour t cannot gran t the extraord inaryremedy of in junc t ive r e l i e f without cons ider ing the publ ic i n t e r e s t .See, e . g . , eBay, Inc . v. MercExchange, 547 U.S. 388, 391(2006) (UAccording to wel l -es tab l i shed p r i n c i p l e s of equ i ty , ap l a i n t i f f seeking a permanent in junc t ion ... must demonstratet ha t the publ ic i n t e r e s t would not be disse rved by a permanentin junc t ion . H ). Indeed, the Court has he ld t ha t " ' In exerc is ing t h e i rd i sc re t ion , cour t s ... should pay par t i cu l a r regard fo r the publ icconsequences in employing the extraord inary remedy of in junc t ion . " '555 U.S. 7, 24(2008) (quoting Weinberger v. Romero-Barcelo, 456 U.S. 305, 312(1982 . S imi la r ly , the Second Circu i t has repea tedly s t a t e d , mostr ecen t ly in Sa l inge r v. Col t ing , 607 F.3d 68, 80 (2d Cir . 2010), t h a t

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a cour t \\must ensure t ha t the publ ic i n t e re s t s would not be disse rvedby th e suance" of an in junc t ion . rd . a t 80.

As a f a l l -back , th e S.E.C. sugges ts t ha t , i f the pub l i c i n t e re s tmust be t aken i n to account , the S.E.C. i s the so le dete rminer o f whati s in th e publ ic i n t e re s t in regard to Consent Judgments se t t l i ngS.E.C. cases . See SEC Mem. a t 4 n .1 ( c i t SEC v. Randolph, 736 F.2d

(9 th525, 529 Cir . 1984) . That , again, i s not the law. Although ini t s somewhat delphic dec i s ion in Randolph th e Ninth C i rc u i t foundt ha t , on the f ac t s of t h a t case , the re was no d i f fe rence between th erequirement of reasonableness and the requ i rement of being in th epub l i c i n t e re s t , it was emphat ic in upholding " the appropr ia teness ofa requirement t ha t th e decree be in the publ ic i n t e r e s t . " a t 529.More per t inen t ly , the D.C. Circu i t , i n United S ta t e s v. TruckingEmployers. Inc . , 561 F.2d 313 (DC Cir . 1977), rea f f i rmed t h a t "p r io rto approving a consent decree a cour t must sa t i s f y i t s e l f of these t t l emen t ' s ' ove ra l l f a i rnes s to benef i c i a r i e s and cons is tency withthe publ ic i n t e r e s t . ' " Id . a t 319 (quot ing United S ta t e s v.

(5 thAllegheny Ludlum Indus t r i e s , 517 F.2d 826, 850 Cir .1975) (emphasis supp l i ed ) . As the se and s imi la r a u tho r i t i e s makep la in , a cour t , while giving su b s t a n t i a l deference to the views of anadmin i s t ra t body ves ted with au thor i ty over a par t i cu l a r area ,must still exe rc i se a modicum of independent judgment in dete rmin ingwhether the reques ted deployment i t s in junc t ive powers wi l l serve ,

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or d isse rve! publ ic i n t e r e s t . Anything l e s s would not onlyvio la te the cons t i tu t iona l doctr ine of separa t ion of powers but wouldundermine the independence t ha t i s the indispensable a t t r i bu t e of thef edera l j ud ic ia ry .

As a prac t i ca l matter! moreover! and as impl ies! therequirement t ha t a consent judgment be in the publ ic i n t e r e s t notmeaningful ly severable from the requi rements! still acknowledged bythe S.E.C.! t ha t the consent judgment be fa i r ! reasonable, andadequate; fo r a l l these requi rements inform each o ther . For example,before the Court determines whether the proposed Consent Judgment i sadequate , must answer a pre l iminary ques t ion: adequate fo r whatpurpose? The answer, a t l ea s t in par t , i s t h a t the se t t l emen t mustbe adequate to ensure t ha t the publ ic i n t e r e s t i s pro tec ted . SeeRandolph, 736 F.2d a t 529 (" the SEC ought to always be required toserve publ ic i n t e res tH) . The same analys is app l ies to thedete rmina t ion of the ss of the se t t l emen t . Before the Courtdetermines whether the se t t lement i s f a i r , it must ask a l iminaryques t ion: f a i r to whom? As the hold ing of Trucking Employers quotedabove makes p la in , the answer i s f a i r to the par t i e s to thepubl

without mult ip ly ing examples, it i s c l e a r t ha t before a cour tmay employ i t s in junc t ive and contempt powers in suppor t of anadminis t ra t ive se t t lement ! it i s requi red , even a f t e r giving

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subs tan t i a l deference to the views of the admin is t r a t ive agency, tobe sa t i s f i ed t h a t it i s not being used as a too l to enforce anagreement t h a t i s unfa i r , unreasonable , inadequate , o r incontravent ion of the publ ic i n t e r e s t .

Applying these s tandards to the case in hand, the Cour tconcludes, r e g re t f u l l y , t h a t the proposed Consent Judgment i s ne i the rf a i r , nor reasonable , nor adequate , nor in th e publ ic i n t e r e s t . Mostfundamenta l ly , t h i s i s because it does n ot provide the Cour t with as u f f i c i e n t ev iden t ia ry bas i s to know whether the reques ted r e l i e f i sju s t i f i ed under any of these s tandards . Pure ly pr iva te pa r t i e s cans e t t l e a case wi thou t ever agree ing on th e f ac t s , fo r a l l t h a t i srequi red i s t h a t a p l a i n t i f f dismiss h is complain t . 2 But when apubl ic agency asks a cour t to become i t s par tne r in enforcement byimposing wide-ranging in junc t ive remedies on a defendan t , enforced bythe formidable j ud i c i a l power of contempt,3 the cour t , and thepubl ic , need some knowledge of what th e under ly ing f ac t s are : forotherwise , the cour t becomes a mere handmaiden to a se t t l emen tpr iva te ly negot ia ted on the bas i s of unknown f ac t s , while the publ ic

2 When the pr iva te par t i e s go fu r the r and ask a cour t to r e t a i n j u r i sd i c t i on toenforce the se t t l emen t , a cour t has t o t a l d isc re t ion whether or no t to do so, seegenera l ly Kokkonen v. Guardian Life Insurance Co., 511 U.S. 375, 381 (1994), andmany judges in t h i s D i s t r i c t rou t ine ly dec l ine to approve a s t i p u l a t i o n of th ep a r t i e s tha t so provides .3 Th e Second Circu i t has descr ibed the contempt power as "among the most formidableweapons in th e c o u r t ' s a rsena l . " United Sta tes v. Local 1804-1, Int'lLongshoremen's Ass 'n , AFL-CIO, 44 F.3d 1091, 1095 (2 d Cir . 1995) .

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i s deprived of ever knowing the t r u th in a mat te r of obvious publ icimpor tance .

Here, the S.E .C . ' s long-s tanding po l icy - hal lowed by h i s to ry ,bu t no t by reason - of a l lowing defendan ts t o en te r in to ConsentJudgments withou t admi t t ing o r denying the under ly ing a l lega t ions ,4depr ives the Cour t of even th e most minimal assurance t ha t thesu b s t a n t i a l in junc t ive r e l i e f it i s being asked to impose has anybas i s in There i s little r e a l doubt t h a t Ci t igroup con tes t sthe f ac tua l a l l ega t ions of th e Complaint . In co l loquy wi th theCourt , counsel Ci t igroup express ly reconf i rmed t h a t h is c l i en twas no t admi t t ing the a l l ega t ions of th e Complaint , see t r . 13. Hea l so noted , cor rec t ly , t ha t he was f ree - notwi ths tanding theS.E .C . ' s gag orde r prec luding Ci t igroup from con tes t ing the S.E .C . ' sa l l e g a t i o n s i n the media 5 - to fu l ly con tes t the f ac t s in anyp a r a l l e l l i t i g a t i o n ; and he s t rongly h in ted t h a t Ci t igroup would doj u s t t ha t . Tr. 26-27; see Citibank Mem. a t 7-8, 11.

The S.E.C. , by con t ras t , took th e pos i t ion t ha t , becauseCi t igroup d id no t express ly deny the a l l ega t ions , the Court , and th e

4 See Vitesse , 771 F. Supp. 2d a t 308-10 ( t rac ing th e h is to ry of the pol icy) .On i t s face , the SEC's no-denia l pol icy ra i ses a p o te n t i a l F i r s t Amendment

problem. See 771 F. Supp. 2d a t 309 ("[Hlere an agency of the UnitedSta tes i s saying , in e f f e c t , 'Al though we claim tha t these defendants have donet e r r ib l e th ings , refuse to admit it an d we do not propose to prove it, butwil l simply re so r t to gagging t h e i r r igh t to i t 'H ) ; see Crosby v.Brads t r ee t Co., 31 2 F.2d 483, 48 5 (2 d Cir . 1963) ( revers ing a consent se t t l emen tbetween tw o p a r t i e s because the " in junc t ion , enforceable through the contemptpower, const i tu te[d] a r e s t r a i n t by the United Sta tes aga ins t the pub l i ca t ionof f ac t s which the community has a to knowH) .

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pub l i c , somehow knew t r u th the a l l e g a t i o n s . Tr. 12-13. Thisi s wrong as a mat te r of law and unpersuasive as a mat te r of fac t . Asa mat te r of law, an a l l ega t ion t ha t i s ne i the r admi t ted nor deniedsimply t ha t , an a l l e g a t i o n . I t has no ev iden t ia ry va lue and noco l l a t e ra l es toppe l e f f e c t . I t i s prec ly fo r t h i s reason t ha t theSecond C i r c u i t held long ago, in Lipsky v. Commonwealth United Corp.,551 F.2d 887 (2d Cir . 1976), t h a t "a consent judgment between af edera l agency and a pr iva te corpora t ion which i s no t the r e s u l t ofan a c tu a l ad jud ica t ion of any of the i s sues ... can no t be used asevidence in subsequent l i t i g a t i o n . " Id . a t 893. I t l lows t ha t th ea l l ega t ions of the complain t t ha t gives r i s e to the consen t judgmentare not evidence of anything e i t he r . Indeed the Lipsky cour t went sofa r as to hold t ha t "ne i the r [an S.E.C.] complain t nor re fe rence to[such] a complain t which r e s u l t s in a consent judgment may proper ly

be c i ted in the pleadings" in a p a r a l l e l pr iva te ac t ion and mustins tead be s t r i cken . Id .

As fo r common exper ience , a consent judgment t ha t does notinvolve any admiss ions and t ha t r e s u l t s in only very modest pena l t i e si s j u s t as f requent ly viewed, par t i cu l a r l y in the bus iness community,as a cos t of doing business imposed by having to mainta in a workingre l a t ionsh ip with a regu la to ry agency, r a the r than as any i nd ica t ionof where the r e a l t r u th l i e s . This , indeed, i s Ci t ig roup ' s pos ionin t h i s very case . See Cit igroup Mem. a t 6-8.

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Of course , the pol icy of accept ing se t t l emen ts without anyadmiss ions se rves var ious narrow i n t e re s t s of the p a r t i e s . In t h i scase , fo r example, Ci t igroup was ab le , without admit t ing anyth ing , tonego t ia te a se t t l emen t t h a t (a ) charges it only wi th negl igence , (b)r e s u l t s i n a very modest pena l ty , (c) imposes the kind of in junc t iver e l i e f t h a t Ci t igroup (a r e c id iv i s t ) knew t ha t the S.E.C. had notsought to enforce aga ins t any f inanc ia l i n s t i t u t ion fo r a t l e a s t thel a s t 10 years , see SEC Mem. a t 23, and (d) imposes r e l a t i ve l yinexpensive prophylac t ic measures fo r the next th ree yea rs . Inexchange, Ci t igroup not on ly s e t t l e s what it s t a t e s was a broad-ranging four-year i nves t iga t ion by the S.E.C. of Ci t ig roup ' smortgage-backed s e c u r i t i e s of fe r ings , Tr. 27, bu t a l so avoids anyi nves to rs ' r e ly ing in any re spec t on the S.E.C. Consent Judgment inseeking r e tu rn of t h e i r lo s ses . I f th e a l l ega t ions o f the Complaintare t rue , t h i s i s a very good dea l fo r Cit igroup; and, even i f theyare untrue , it i s a mild and modest cos t of doing bus ine ss .

I t i s harder to d isce rn from the l imi ted informat ion before theCourt what the S.E.C. i s ge t t ing from t h i s se t t lement o ther than aquick headl ine . By the S.E .C . ' s own account , Cit igroup i s ar ec i d i v i s t , SEC Mem. a t 21, and ye t , in terms o f de te r rence , the $95mil l ion c i v i l pena l ty t h a t the Consent Judgment proposes i s pocketchange to any en t i t y as la rge as Cit igroup. While th e S.E.C. cla ims

Although th e S.E.C. a s s e r t s t h a t the f ac t t h a t it i s only charging negligencel imi t s the amount of money it can recover from Cit igroup, e i t he r by wa y of c i v i l

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t ha t it i s devoted , not j u s t to the p r o t e c t i o n of inves to r s b ut a l soto helping them recover t h e i r lo s ses , th e proposed Consent Judgment,in the form submit ted to the Court , does not commit the S.E.C. tore tu rn ing any of th e t o t a l of $285 mil l ion obta ined from Ci t igroup tothe defrauded inves to r s bu t only sugges ts t h a t the S.E.C. "may" doso . Consent Judgment a t 3. In any event , t h i s still l eaves thedefrauded inves to r s s ubs t a n t i a l l y shor t -changed. To be sure , a t o ra largument, the S.E.C. reaf f i rmed i t s long s tand i ng purpor ted suppor tfo r pr iva te c i v i l ac t ions des igned to recoup i nves to rs ' lo s ses . Tr.10. But in a c tua l i t y , th e combinat ion of charging t i g roup onlywi th negligence and then pe rmi t t ing Ci t igroup to s e t t l e withoute i t he r admi t t ing o r denying th e a l l ega t ions dea l s a double blow toany as s i s t ance th e defrauded inves to r s might seek to de r ive from theS.E.C. l i t i g a t i o n in a t tempt ing to recoup t h e i r lo s ses th roughpr iva te l i t i g a t i o n , s ince pr iva te inves to r s not only cannot br ings e c u r i t i e s cla ims based on negl igence, see , , Erns t & Erns t v.Hochfelder , 425 U.S. 185 (1976), bu t also cannot de r ive anyco l l a t e ra l es toppe l as s i s t ance from Ci t ig roup ' s non admiss ion/non-den ia l of the S.E .C . ' s a l l ega t ions . Nor, as noted , does the pub l i c ,

penal ty o r by way of disgorgement, see SEC Mem. a t 17, it acknowledges in afootnote tha t the Second C i rc u i t has assumed t h a t "equ i tab le res t i tu t ion" i sava i l ab le in any government enforcement ac t ion . SEC Mem. a t 17 n.6 (c i t ingv. Veri ty lnt'l, Ltd . , 443 F.3d 48, 66 (2 d Cir . 2006)) .

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espec ia l ly the bus i ness pub l i c , have any reason to c r e d i t thosea l l ega t ions , which remain en t i r e l y unproven. 7

The po in t , however, i s no t t h a t c e r t a in narrow i n t e re s t s o f thepa r t i e s might no t be served by the Consent Judgment , bu t r a t h e r t h a tthe p a r t success fu l r eso lu t ion of t h e i r compet ing i n t e re s t scannot be automat ica l ly equa ted with th e pub l i c i n t e r e s t , espec ia l lyin th e absence of a f a c tu a l base on which to asse ss whether ther eso lu t ion wa s f a i r , adequa te , and r ea sonab l e . Even a f t e r giving th ef u l l e s t deference to the S.E .C . ' s views - which have more than once"The Court i s a l so t roub led when it compares the proposed Consent Judgment with theconsent judgment en te red l a s t year between the SEC and Goldman Sachs ("Goldman").See SEC v. Goldman Sachs & Co. e t a l . , No. 10 Civ. 3229 (BSJ), Dkt. 25 ("GoldmanConsent Judgment") . Goldman involved a s imi la r but arguably l e s s egregious f ac tua lscenar io in tha t Goldman was charged with no t d i sc los ing t h a t an outs ide hedgefund, Paulson & Co., had played a s ig n i f i c a n t ro le in the por t fo l io se lec t iona shor t pos i t ion in the asse t s it had se lec t ed . SECrocess and had maintainedsupra , Dkt. 1 ("Goldman Complaint") 2. Nonetheless , theconsent judgment in Goldman required Goldman to pay a $535 mil l ion pena l ty , eventhough it made only $1 5 mil l ion in pro f i t s . Goldman Consent Judgment 2. Here,as noted above, Citigroup made $160 mil l ion in pro f i t s and pa id only a $9 5 mil l ionf ine . The SEC argues t h a t Goldman was charged with based v io la t ions , andt h a t those v io la t ions make possib le a more s ig n i f i c a n t sanc t ion . SEC Mem. a t 19.This log ic i s c i r c u l a r , however, because the SEC does not expla in how Goldman'sact ions were more culpable or sc ienter-based than Cit ig roup ' s ac t ions here .Furthermore, the consent judgment in Goldman conta ined severa l terms t ha t arenotably missing from the proposed Consent Judgment here . Fi r s t , the consentjudgment included the fol lowing express admiss ion from Goldman:

"Goldman acknowledges tha t the market ing materia ls for the ABACUS 2007-ACI t ransac t ion conta ined incomplete informat ion . In par t i cu l a r , it wasa mistake fo r the Goldman market ing mate r i a l s to s t a t e t h a t thereference por t fo l io wa s ' s e lec ted by ' ACA Management LLC withoutdisc losing the ro le of Paulson & Co. Inc . in the por t fo l io se lec t ionprocess and t ha t Paulson 's economic i n t e r e s t s were adverse to[por t fo l io] i nves to rs . Goldman reg re t s tha t the market ing mate r i a l s d idnot contain tha t d i sc losu re . "

(Goldman Consent Judgment 3 .) Second, Goldman agreed to add i t iona l remedialmeasures beyond those agreed to by Cit igroup in the i n s t a n t case . Third , Goldmanagreed to cooperate with the SEC in a number of ways, such as making i t s employeesava i l ab le for in terv iews by SEC s t a f f and order ing i t s employees to t e s t i f y "a tt r i a l and o ther j ud i c i a l proceedings when requested by Commission s ta f f . " Id . 17.By con t ras t , Cit igroup has no t agreed to cooperate with the SEC in any cognizablere spec t . SEC Mem. 21.

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persuaded t h i s Cour t to approve an S.E.C. Consent Judgment it founddubious on the mer i t s , see , e . g . , Bank of America I I , supra theCourt i s forced to conclude t h a t a proposed Consent Judgment t ha tasks the Court to impose su b s t a n t i a l in junc t ive r e l i e f , enforced bythe Cour t ' s own contempt power, on the bas i s of a l l ega t ionsunsupported by any proven o r acknowledged fac ts whatsoever , i sne i the r reasonable , nor f a i r , nor adequate , nor in the publ ici n t e re s t .

I t i s not reasonable , because how can it ever be reasonable toimpose su b s t a n t i a l r e l i e f on the bas i s of mere a l l ega t ions? It i snot f a i r , because, desp i te C i t ig roup ' s nominal consent , the po te n t i a lfo r abuse in imposing pena l t i e s on the bas i s o f f ac t s t ha t a rene i the r proven nor acknowledged pa ten t . I t i s not adequate ,because , in the absence of any f ac t s , the Court l acks a framework fo r

determining adequacy. And, most obvious ly , the proposed ConsentJudgment does not serve the publ ic i n t e r e s t , because it asks theCourt to employ i t s power and a s s e r t i t s au thor i ty when it does notknow the fac t s .

An app l ica t ion of j ud i c i a l power t ha t does not r e s t on f ac t s i sworse than mindless , it i s inheren t ly dangerous. The in junc t ivepower o f the j ud ic ia ry i s not a f r ee roving remedy to be invoked a tthe whim of a regula tory agency, even with th e consent o f theregu la t ed . I f i t s deployment does no t r e s t on f ac t s

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so l id f ac t s , e s t ab l i shed e i by admiss ions or by t r i a l s - itserves no lawful or moral purpose and i s s imply an engine ofoppress ion .

Fina l ly , in any case l ike t h i s t ha t touches on the t ransparencyof f inanc ia l markets whose gyra t ions have so depressed our economyand de b i l i t a t e d our l i v e s , the re i s an overr id ing pub l i c i n t e r e s t inknowing the t r u th . In much of the world, propaganda r e igns , andt r u th i s conf ined to sec re t ive , f ea r fu l whispers . Even in ourna t ion , apo log is t s fo r suppress ing o r obscur ing the t ru t h may alwaysbe found. But the S.E.C. , of a l l agenc ies , has a duty , i nhe ren t ini t s s ta tu tory mission , to see t ha t the t r u th emerges; and i f f a i l sto do so , t h i s Court must no t , in the name of defe rence orconvenience , gran t j u d i c i a l enforcement to the agency ' s cont r ivances .

Accordingly , the Court re fuse s to approve the proposed ConsentJudgment. Ins tead , the Court hereby consol idates t h i s case wi th theStoker ac t ion , adopts the Case Management Order in t ha t ac t ion asequa l ly appl icable to the i n s t a n t case , and d i r e c t s the pa r t s to beready to t ry t h i s case on Ju ly 16, 2012.

SO ORDERED.

Dated: New York, NYNovember 28, 2011

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