## Facts

- The SEC alleged that in early 2007 Citigroup structured a $1 billion collateralized debt obligation, Class V Funding III, after identifying weakness in the mortgage-backed securities market.
- The SEC alleged Citigroup used the vehicle to place negatively projected assets with investors while taking a short position in assets it helped select.
- The SEC alleged Citigroup represented that an independent investment adviser rigorously selected the portfolio, despite Citigroup’s alleged role in selecting a substantial portion of negatively projected assets.
- The SEC alleged Citigroup obtained approximately $160 million in net profits, while investors lost more than $700 million.
- In a related action against a Citigroup employee, the SEC alleged facts implying knowing misconduct, which the court viewed as inconsistent with charging Citigroup only with negligence.
- The SEC and Citigroup jointly presented a proposed consent judgment at the outset of the case, before any discovery and without an answer on file.
- The proposed consent judgment sought a permanent injunction against future violations of Securities Act § 17(a)(2) and (3), $160 million in disgorgement plus interest, and a $95 million civil penalty, while permitting Citigroup to “neither admit nor deny” the allegations.

## Issues

1. What standard must a district court apply when deciding whether to enter an SEC consent judgment, including one containing a “neither admit nor deny” provision?
2. Under that standard, may the court approve the proposed consent judgment on the record presented?

## Decision

- The court held it must independently determine whether an SEC consent judgment is fair, reasonable, adequate, and in the public interest.
- The court denied the joint motion and refused to enter the proposed consent judgment.
- The court found the record insufficient to evaluate the propriety of injunctive and monetary relief where the allegations were neither admitted nor supported by proof developed in litigation.
- The court expressed concern that the settlement’s terms and charging decisions were not adequately justified given the seriousness of the alleged conduct and the magnitude of investor losses.

## Legal Principles

- A consent judgment is a judicial act, not merely a private agreement; a court must conduct an independent review before entering it.
- In SEC enforcement settlements, the court must be able to determine—on an adequate factual basis—that the relief is fair, reasonable, adequate, and consistent with the public interest.
- A “neither admit nor deny” provision may hinder meaningful judicial review where the court is asked to impose significant injunctive and monetary relief without established facts.
- When the requested relief includes forward-looking injunctive provisions, the court may require more than untested allegations to assess whether the decree is justified and serves the public interest.

## Conclusion

The district court refused to enter the SEC–Citigroup consent judgment because, without admissions or an evidentiary record, it could not responsibly find the settlement fair, reasonable, adequate, and in the public interest, particularly in light of allegations suggesting more serious misconduct than the negligence charges presented.


SEC v. Citigroup Glob. Mkts., Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011)