Brief of Harvey Pitt - S.E.C. v. Citigroup Global Markets

11-5227-cv

IN THE

United States Court of Appeals FOR THE SECOND CIRCUIT

___________________

UNITED STATES SECURITIES AND EXCHANGE COMMISSION,

Plaintiff-Appellant-Cross-Appellee,

—against—

CITIGROUP GLOBAL MARKETS INC.,

Defendant-Appellee-Cross-Appellant.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

BRIEF OF AMICUS CURIAE FORMER SECURITIES AND EXHANGE COMMISSION

GENERAL COUNSEL AND CHAIRMAN, HARVEY PITT IN SUPPORT OF

AFFIRMANCE OF DISTRICT COURT’S RULING

Teresa M. Goody KALORAMA LEGAL SERVICES, PLLC

1130 Connecticut Avenue, NW

Suite 800

Washington, DC 20036

(202) 721-0000 Attorney for Amicus Curiae

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TABLE OF CONTENTS

STATEMENT OF INTEREST OF AMICUS CURIAE............................................. 1

INTRODUCTION ..................................................................................................... 2

STATEMENT OF THE CASE .................................................................................. 5

DISCUSSION ............................................................................................................ 9

I. The SEC Applies Exacting Standards Before Its Staff Files or Resolves

Enforcement Actions ....................................................................................... 9

II. The SEC Can Seek or Obtain Injunctive Relief Only If It Demonstrates

There is a Reasonable Likelihood the Defendant Is Violating, or Is About to

Violate, the Federal Securities Laws .............................................................15

III. The Review of the Consent Judgment the District Court Attempted is Not

Novel, and Can Easily Be Satisfied By the SEC ...........................................19

A. The District Court Did Not Create Any “Novel” or “Bright-Line

Standard” for Judicial Review of Proposed Consent Orders ..............20

B. The Questions Posed by the District Court About the Proposed

Consent Judgment, If Answered, Would Have Enabled the Court to

Approve the Settlement .......................................................................22

C. The SEC Is Already in a Position to Satisfy the District Court’s

Decision, and Should Not Be Restricted from Resolving Enforcement

Matters Consensually ..........................................................................26

CONCLUSION ........................................................................................................29

ii

TABLE OF AUTHORITIES

Cases

Aaron v. SEC, 446 U.S. 680 (1980) .....................................................................3, 17

Hecht Co. v. Bowles, 321 U.S. 321 (1944) ................................................................ 5

SEC v. Bank of Am., 2010 WL 624581 (S.D.N.Y. Feb. 22, 2010) ................... 27, 28

SEC v. Caterinicchia, 613 F.2d 102 (5th Cir. 1980) ................................................. 9

SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90 (2d Cir. 1978) ....................16

SEC v. First Fin. Grp., 645 F.2d 429 (5th Cir. 1981) ..............................................16

SEC v. Goldman Sachs & Co., No. 10-3229 (S.D.N.Y. July 20, 2010) ..... 25, 27, 28

SEC v. Koracorp Indus., Inc., 575 F.2d 692 (9th Cir. 1978) ...................................16

SEC v. Levine, 881 F.2d 1165 (2d Cir. 1989) .........................................................22

SEC v. Randolph, 736 F.2d 525 (9th Cir. 1984) ......................................... 16, 18, 21

SEC v. Stoker, No. 11-7388, Dkt. No. 91 (S.D.N.Y. Aug. 6, 2012) ........................25

SEC v. Vitesse Semiconductor Corp., 771 F. Supp. 2d 304 (S.D.N.Y. 2011) .........18

SEC v. Wang, 944 F.2d 80 (2d Cir. 1991) ...............................................................22

U.S. v. Allegheny Ludlum Indus., 517 F.2d 826 (5th Cir. 1975) .............................22

U.S. v. Trucking Emp’rs, Inc., 561 F.2d 313 (D.C. Cir. 1977) ................................22

Statutes

5 U.S.C. §552b(e)(1) ................................................................................................11

15 U.S.C. §77h-1(a) .................................................................................................29

15 U.S.C. §77q(a)(1) ................................................................................................16

iii

15 U.S.C. §77q(a)(2) ............................................................................................6, 17

15 U.S.C. §77q(a)(3) ............................................................................................6, 17

15 U.S.C. §77t(b) .....................................................................................................15

15 U.S.C. §77t(d) .....................................................................................................15

15 U.S.C. §78j(b) .....................................................................................................16

15 U.S.C. §78o(c)(1) ................................................................................................16

15 U.S.C. §78u(a) ...................................................................................................... 9

15 U.S.C. §78u-3(a) .................................................................................................29

15 U.S.C. §80a-41(d) ...............................................................................................15

15 U.S.C. §80b-9(d) .................................................................................................15

28 U.S.C. §1292(a) .................................................................................................... 9

Dodd–Frank Wall Street Reform and Consumer Protection Act,

Pub. L. 111-203 §929P ........................................................................................... 29

Regulations

17 C.F.R. §200.403(b) .............................................................................................11

17 C.F.R. §240.10b-5 ...............................................................................................16

Rules

2d Cir. LOCAL R. APP. P. 29.1 .................................................................................... 1

FED. R. APP. P. 29(b) .................................................................................................. 2

FED. R. APP. P. 29(c)(5) ............................................................................................. 1

FED. R. CIV. P. 11 .....................................................................................................26

iv

Other Authorities

Aulana L. Peters, Former SEC Commissioner, Address to the Washington Bar

Association: SEC Litigation: Thought on When to Settle and Try Cases

(Apr. 17, 1985) .........................................................................................................14

Barclays Shares Plummet 17% as Rate-Rigging Scandal Threatens to Engulf More Banks, THE HUFFINGTON POST (UK ed.) (June 28, 2012) .........................................19

Letter from Mary Schapiro, SEC Chairman, to The Honorable Jack Reed,

Subcommittee on Securities, Insurance and Investment Chairman, Committee on

Banking, Housing and Urban Affairs (Nov. 28, 2011) ............................................14

SEC Division of Enforcement Office of Chief Counsel, ENFORCEMENT MANUAL

(Mar. 9, 2012) ....................................................................................... 10, 11, 12, 14

SEC Lit. Rel. No. 17534, SEC v. John E. Brinker, Jr., Gary J. Benz, et al., Civil

Action No. IP01-0259 C-H/G (S.D. Ind.) (May 24, 2002) ......................................19

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STATEMENT OF INTEREST OF AMICUS CURIAE1

In this proceeding, the Securities and Exchange Commission (“SEC” or

“Commission”) raises important issues regarding the viability and effectiveness of

its enforcement program and, specifically, a significant component thereof—

settlement before trial of a substantial majority of enforcement actions the SEC

institutes. Mr. Pitt, a former SEC Chairman and General Counsel, is and has been

actively engaged in the development and implementation of the SEC’s

enforcement program throughout his professional career, and is a proponent of an

active and effective SEC enforcement program. In that context, over the past 44

years, he has variously been:

An architect of, and policy-maker for, the SEC’s enforcement

program;

An advocate for SEC enforcement initiatives before this Court, other

federal appellate courts, and the U.S. Supreme Court;

A counselor and advocate for public, quasi-public and private-sector

enterprises involved in specific SEC enforcement proceedings; and,

currently,

1 Pursuant to Local Rule of Appellate Procedure 29.1 and Federal Rule of

Appellate Procedure 29(c)(5), no party or party’s counsel authored this brief in

whole or in part; no party or a party’s counsel contributed money that was intended

to fund preparing or submitting this brief; and no one other than the amicus curiae

and his counsel contributed money that was intended to fund preparing or

submitting the brief.

2

An advisor to independent members of corporate and institutional

governing boards seeking to respond constructively to indications of

potentially improper behavior.

Mr. Pitt has forged thousands of SEC enforcement settlement agreements

and obtained judicial approval for them. His understanding of the critical role

settlements play in the Agency’s enforcement program, the manner in which SEC

Commissioners consider whether to institute enforcement proceedings and, if so,

what charges should be raised, and the role Agency Members play in considering

proposed settlements of enforcement matters, can provide important context for

this Court’s resolution of the legal issues the parties have briefed. See FED. R. APP.

P. 29(b).

INTRODUCTION

The SEC and Citigroup Global Markets, Inc. (“Citigroup”) seek reversal of

the district court’s Order declining to exercise its equitable discretion to approve a

proposed settlement of negotiated enforcement allegations. Undoubtedly, the

SEC’s ability to bring and resolve complex enforcement cases by thoughtful and

creative civil settlements is an important lynchpin of its enforcement program that

promotes confidence in the integrity of our capital markets, and fosters

understanding on the part of the financial services industry of its statutory,

regulatory and ethical obligations.

3

But, invocation of this Court’s jurisdiction in this case is based upon a

mistaken reading of the district court’s Order—one that threatens to convert the

district court’s fact-specific disposition, affecting only the single case before it,

into a broader rule that, ultimately, could undermine the effectiveness of the SEC’s

enforcement program. And, the result the SEC and Citigroup urge here—directing

the district court to enter an injunction—runs counter to the Supreme Court’s

express recognition that district courts possess broad discretion to decline to grant

SEC requests for equitable relief in individual cases even if, after trial, all

applicable statutory standards have been satisfied. Aaron v. SEC, 446 U.S. 680,

701 (1980).

Moreover, this Court’s intervention is unnecessary for the SEC and

Citigroup to achieve their consensual resolution of the SEC’s claim that Citigroup

defrauded investors. The SEC should, without any burden beyond those already

satisfied in filing its lawsuit, easily be able to demonstrate a persuasive basis for

the district court’s discretionary grant of injunctive relief; alternatively, given

broad revisions in the federal securities laws this past decade, the SEC can achieve

a result virtually equivalent to that it sought in district court, by lodging and

settling its claims administratively.

Before deciding whether to exercise its equitable discretion, the district court

sought answers to a limited number of questions raised by the SEC and Citigroup

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filings, the lawsuit’s subject matter, and the nature of the proposed relief. Those

are the same questions SEC Commissioners raise before authorizing Staff to

institute enforcement proceedings, or approving Staff-negotiated settlements—over

nearly eighty years, SEC Enforcement Staff invariably have justified proposed

settlements, meaningfully rationalized differences in relief sought in comparable

cases, and articulated cogent reasons a proposed settlement furthers the public

interest.

SEC Commissioners do not “rubber stamp” Staff recommendations either to

file or settle litigation; they would violate their statutory obligations if they did.

Rather, they actively explore the nature of the claims involved, reasons for any

disparities in settlements involving comparable factual circumstances, and likely

consequences of Staff-proposed allegations or remedies. Yet here, where the

district court also declined to “rubber stamp” a specific settlement proffered by the

SEC and Citigroup, it is claimed the district court’s effort to obtain answers to its

questions will impede enforcement prerogatives by creating a new bright-line test

before negotiated consent decrees can be judicially approved—that defendants

must admit allegations in SEC Complaints.

But, the district court did not articulate or impose any such rule, nor could it

have done so—the law does not require defendants to admit SEC allegations

before cases can be settled, nor does it permit district courts to require admissions

5

as the price of obtaining judicial approval for a negotiated settlement. Rather, the

district court raised questions with which SEC Enforcement Staff are familiar from

their interchanges with SEC Commissioners, and as to which they should have

readily-available answers.

The invocation of this Court’s jurisdiction, however, poses a danger that, in

arguing the district court abused its discretion, the SEC effectively contends the

district court had no discretion to withhold approval of the settlement. Since there

is no basis for that proposition, the danger is that courts, in response, may

recalibrate the “nice adjustment and reconciliation between the public interest and

private needs.” Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944). That is a danger

this Court should avoid.

STATEMENT OF THE CASE

In 2011, the SEC filed two complaints, alleging fraud in the sale of

mortgage-backed securities and seeking injunctive and other equitable relief—one

against Citigroup (JA-14–34),2 and the other against a former midlevel Citigroup

executive, Brian Stoker. (SA-1–26; SPA-1–2.) The SEC essentially alleged that,

as the mortgaged-backed securities market weakened, Citigroup sold

underperforming assets to new investors, falsely representing that an independent

2 References to the Joint Appendix are “JA”; references to the Special

Appendix are “SPA”; references to the Supplemental Appendix are “SA.”

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investment adviser had rigorously selected the assets. (JA-14 ¶1, JA-15 ¶2, JA-19

¶58.)

Concurrent with sales of these assets, Citigroup allegedly took “short”

positions in some of the same assets, seeking to profit from their continued

deterioration. (JA-28 ¶¶44–45, JA-29 ¶46.) Citigroup allegedly realized $160

million in profits, while investors allegedly lost over $700 million. (JA-33 ¶63,

JA-95.) The SEC’s description of Citigroup’s conduct in its Complaint against

Citigroup depicted negligence, whereas, in its parallel Complaint against Mr.

Stoker, it depicted the same Citigroup conduct as having occurred knowingly, with

fraudulent intent. (SPA-2, compare JA-33–34 ¶65 with SA-2 ¶2, SA-10 ¶25.)

Contemporaneously with filing its Complaints, the SEC presented a

Proposed Consent Judgment against Citigroup (“Consent Judgment”) (SPA-3),

requiring:

(i) Payment of $160 million in disgorged profits, $30 million in

interest, and $95 million in civil penalties;

(ii) Prophylactic measures limiting the risk that Citigroup’s

alleged fraudulent conduct would recur (subject to

continuing district court oversight); and

(iii) Issuance of an “obey-the-law” injunction, permanently

enjoining future violations of the Securities Act of 1933

(“Securities Act”) §§17(a)(2) and (3).

(JA-61–66.)

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To assist its assessment whether the Consent Judgment was fair, reasonable,

adequate, and in the public interest, the district court posed written questions about

specific facets of the case (JA-68–71), and held a hearing on the parties’ responses.

(see generally JA-198–232.) Among other things, the district court sought

clarification whether Citigroup’s conduct was knowing and intentional (the

elements of scienter) or negligent. (JA-70, JA-221–22, JA-231.) It noted the SEC

alleged identical Citigroup conduct in two conflicting ways—against Citigroup, it

alleged Citigroup acted negligently, yet against Stoker, it claimed Citigroup’s same

acts were knowing and intentional. (SPA-2–3.)

The SEC responded that the “allegations in [its] complaint [set] forth in

detail what [the Agency] believe[s] occurred in this case” (JA-209), causing the

Judge to question his ability to assess the Consent Judgment without understanding

the actor’s alleged state of mind. (JA-231.) Absent an adequate explanation or,

alternatively, some evidentiary record, the district court concluded it lacked

sufficient information about an essential fact to exercise its discretion to issue an

injunction. (SPA-8.)

The Judge also inquired about the SEC’s characterization of Citigroup as a

recidivist. (JA-216.) He noted the SEC settled comparable, but potentially less

egregious, claims against Goldman Sachs & Co.—a firm the SEC advised was not

a recidivist—for considerably higher monetary penalties. (SPA-13 n.7.) Absent a

8

factual basis to differentiate Citigroup’s conduct from Goldman Sachs’, and an

explanation for the disparity in the relief sought against both firms, the district

court questioned how it could assess the Consent Judgment’s fairness. (Id. & SPA-

14.)

The SEC urged that an evidentiary record was unnecessary, asserting its

Complaint’s allegations were entitled to judicial deference. (JA-79, JA-81–87.) In

addition, it argued that the arm’s-length negotiations leading to the Consent

Judgment warranted judicial approval of the settlement. (SPA-6–8.)

In declining to enter an injunction, the district court held:

before a court may employ its injunctive and contempt powers in

support of an administrative settlement, it is required, even after

giving substantial deference to the views of the administrative

agency, to be satisfied that it is not being used as a tool to

enforce an agreement that is unfair, unreasonable, inadequate, or

in contravention of the public interest.

(SPA-7–8.) Believing the parties had not answered the questions it posed, the

district court held it lacked an evidentiary basis permitting it to determine whether

the proposed settlement satisfied applicable standards. (SPA-8.)

On December 15 and 19, 2011, the SEC and Citigroup, respectively, lodged

appeals from the district court’s Order, and on December 29, 2011, the SEC also

petitioned for a writ of mandamus. 3

3 The Motions Panel left for this Court’s determination the basis of its

jurisdiction over this matter. Since the parties have briefed jurisdiction

9

DISCUSSION

I. THE SEC APPLIES EXACTING STANDARDS BEFORE ITS

STAFF FILES OR RESOLVES ENFORCEMENT ACTIONS

As a creature of statute, clear and direct legislative authority must exist

before the SEC may act, and its actions must conform to the specific legislative

authority it has been given.4 That is especially true in the context of SEC

enforcement actions where, after nearly eighty years, the SEC has a well-

developed methodology for deciding whether and against whom to institute

enforcement proceedings, the subject matter of such proceedings, as well as

whether, and on what terms, it will resolve enforcement claims. That process is a

logical precursor to the inquiry the district court attempted here.

If the SEC’s Enforcement Division believes violations of law have occurred,

or are occurring, it will conduct a thorough law enforcement investigation, replete

with production of documentary evidence and taking of on-the-record, sworn

testimony.5 Commission Enforcement attorneys are adept at developing

extensively, this brief does not address it. The issue is significant, since a lack of

jurisdiction under 28 U.S.C. §1292(a) would mean this Court could only act if the

stricter standards governing mandamus review have been met.

4 See, e.g., SEC v. Caterinicchia, 613 F.2d 102, 105 & n.3 (5th Cir. 1980)

(before an injunction issues at the SEC’s behest, it must meet applicable statutory

standards).

5 See, e.g., §21(a) of the Securities Exchange Act of 1934 (“Exchange Act”),

as amended, 15 U.S.C. §78u(a).

10

“admissible” evidentiary records, and marshaling data demonstrating either that

someone has violated the law, or that there are sound reasons not to pursue a

matter, whether or not violations of law may have occurred.6

The Enforcement Division utilizes a tiered review structure; thus, several

layers of review are performed before the Division reaches any final determination,

and before any recommendation is made to the five SEC Commissioners. In that

context, Staff investigators prepare detailed written memoranda, indicating their

conclusions, describing evidence supporting those conclusions, identifying and

addressing “exculpatory” evidence, and attaching actual documentary materials

evidencing their concerns.7

In virtually all cases, before an enforcement recommendation issues, two or

three supervisory levels within the Division must approve it.8 If the Division

recommends enforcement action to the Commission, it gives the subjects of its

planned action an opportunity to file a “Wells Submission”—a statement of

6 See, e.g., SEC Division of Enforcement Office of Chief Counsel,

ENFORCEMENT MANUAL (Mar. 9, 2012), 62-73 (Maintaining Investigative Files).

7 See id., supra n. 6, at 62–73 (Maintaining Investigative Files).

8 As currently staffed, the Enforcement Division’s senior officials are

individuals with extensive backgrounds in law enforcement, securities fraud civil

and criminal prosecution, litigation, and corporate counseling.

11

reasons militating against institution of the proposed enforcement action.9 This, of

course, provides additional review of enforcement recommendations, since the

Staff considers, assesses and advises the Commission of its responses to legitimate

arguments raised against its recommendations.10

Once a Division position is established, it is reviewed by other SEC

divisions with relevant substantive expertise and the SEC’s General Counsel.

Most Staff recommendations are calendared for Commission action at least one

week before the actual Commission meeting at which they will be considered.11

Advance calendaring gives Commissioners time to review the Staff’s

recommendation.

SEC Enforcement recommendations are typically considered at “closed”

Commission meetings, attended by the five SEC Commissioners and various

9 ENFORCEMENT MANUAL, supra n. 6, at 22–28 (The Wells Process). The

Staff issues a “Wells Notice,” briefly describing its tentative conclusions, and the

bases for them. SEC Staff is not required to issue a “Wells Notice,” but with few

exceptions routinely does so.

10

Commissioners pay close attention to Wells submissions, frequently

questioning Enforcement Division Staff about arguments in them before voting on

Enforcement’s recommendations.

11

Government in the Sunshine Act, Pub. L. 94-409, 5 U.S.C. §552b(e)(1); 17

C.F.R. §200.403(b). Advance calendaring may not occur if an enforcement

recommendation requires more immediate action.

12

members of the SEC’s Staff.12

The Enforcement Division prepares a detailed

“Action Memorandum,” outlining its recommendations, its rationale, and

discussing possible weaknesses in its evidence or theories; other Staff divisions

and offices frequently prepare their own memoranda, commenting on

Enforcement’s recommendations.13

Before the Commission meeting at which an enforcement matter is

considered, individual Commissioners (and their legal assistants) review proposed

enforcement actions; the Enforcement Division is frequently asked about specific

recommendations in advance of actual Commission meetings, to facilitate a more

focused discussion among the five Commissioners.

At closed meetings, Commissioners ask the Staff to explicate theories on

which their proposed actions are premised, and probe evidentiary support for

various claims. The Staff supports its recommendations by addressing anticipated

policy consequences if certain conduct is alleged to be unlawful, or analogizing its

recommended action to previous Commission actions. It is not unusual for

Commissioners to ask, in advance, on what terms the Staff might think an action

should be settled.

12

ENFORCEMENT MANUAL, supra n. 6, at 29–30 (Commission Authorization).

At times, the Commission utilizes “seriatim consideration,” in which each

Commissioner is individually canvassed for his or her approval of a particular

matter. Id. at 30 (Seriatim Consideration).

13

Id. at 38 (The Action Memo Process).

13

Authorized enforcement actions thus go through a detailed review process,

designed to ensure that, if the SEC ultimately files charges, it has a sound basis for

its allegations, and can meet statutory elements of the relief it is seeking. Once a

lawsuit is authorized for filing, or has been filed, many defendants decide to settle

claims, rather than endure protracted litigation.14

In response, the SEC has spent a

great deal of time considering its approach to possible settlements.

In practice, the SEC’s review of Staff recommended settlements is at least as

rigorous as the consideration given to filing charges in the first instance. Among

the factors frequently considered, are:

How does the proposed settlement compare with Staff

representations about the case, including the strength of its

proof, the defendants’ mental state, etc., when the Staff sought

authorization to file the matter?

What policy issues are implicated by the proposed settlement’s

structure?

How does the proposed relief compare with what might be

obtained after successful litigation?

Are the alleged violations systemic, in which case more

extensive prophylactic relief might be required?

14

The SEC routinely settles over 90% of all enforcement proceedings it

institutes. (JA-81–82 (citing cases).) For an agency that commences over 700

proceedings a year and investigates hundreds of additional matters, settling a

substantial proportion of its enforcement proceedings is an absolute necessity.

14

Are the defendants recidivists and should that be addressed in

the proposed settlement?

Is the proposed settlement roughly equivalent to settlements

obtained in comparable cases?15

Over the years, different Chairmen and Commissioners have raised concerns

about different aspects of the Commission’s enforcement program and its policies

regarding settlements.16

These concerns reflect Agency sensitivity to the public

interest in its enforcement actions. The district court’s questions—posed as a

precursor to deciding whether to approve the parties’ proposed settlement—echoed

the kinds of issues the SEC and its Enforcement Division have considered

internally for the entirety of the Agency’s nearly eighty-year existence.

Although the Commission explores issues along the same lines as those to

which the district judge sought responses here—perhaps, in more detail and

substance—it is within the district court’s broad discretion whether to grant

15

See, e.g., ENFORCEMENT MANUAL, supra n. 6, at 4–6 (Ranking

Investigations and Allocating Resources); JA-98–99.

16

See, e.g., Letter from Mary Schapiro, SEC Chairman, to The Honorable Jack

Reed, Subcommittee on Securities, Insurance and Investment Chairman,

Committee on Banking, Housing and Urban Affairs (Nov. 28, 2011) (requesting

enhanced SEC enforcement authority), http://dealbook.nytimes.com/2011/12/05/s-

e-c-seeks-more-power-but-does-it-need-it/#letter; Aulana L. Peters, Former SEC

Commissioner, Address to the Washington Bar Association: SEC Litigation:

Thought on When to Settle and Try Cases, at 9–10 (Apr. 17, 1985),

http://www.sec.gov/news/speech/1985/041985peters.pdf (discussing the need for

the SEC to be ready to litigate cases and the harms to law enforcement of

inadequate settlements).

http://bloomberglaw.com#



15

injunctive relief; thus, it was neither untoward nor inappropriate for that court to

have sought responses to the issues it raised, and the district judge was entitled to

satisfactory responses before deciding whether to sign the Consent Judgment

placed in front of him.

II. THE SEC CAN SEEK OR OBTAIN INJUNCTIVE RELIEF

ONLY IF IT DEMONSTRATES THERE IS A REASONABLE

LIKELIHOOD THE DEFENDANT IS VIOLATING, OR IS

ABOUT TO VIOLATE, THE FEDERAL SECURITIES LAWS

The SEC is statutorily authorized to seek injunctive relief in federal court

under two circumstances—if it appears that “any person is engaged” in acts or

practices constituting a violation of any provision of the federal securities laws, or

if it appears that any person “is about to engage” in such acts or practices. See

Exchange Act §21(d), 15 U.S.C. §78t(d) (emphasis supplied).17

As a practical

matter, the Commission usually learns of violations after their occurrence. As a

result, courts permit the Commission to make a showing of the intent and

knowledge with which a past violation occurred, as support for the Commission’s

17

The SEC has been given comparable authority in §20(b) of the Securities

Act, 15 U.S.C. §77t(b), §42(d) of the Investment Company Act of 1940, 15 U.S.C.

§80a-41(d), and §209(d) of the Investment Advisers Act of 1940, 15 U.S.C. §80b-

9(d).

16

claim that a defendant—unless restrained—will violate the law again or, in terms

of the statute, “is about to engage” in securities law violations.18

Having filed an action, the SEC can obtain injunctive relief if it satisfies two

conditions—first, that all elements of a prima facie statutory violation are

supported by a preponderance of the evidence,19

and second, that a sound basis

exists for such an exercise of a district court’s broad discretion.20

A critical

element of civil litigation involving the antifraud provisions of the federal

securities laws—as is true of the SEC’s cases against Citigroup and Mr. Stoker—is

the alleged wrongdoer’s mental state.

Many of the antifraud provisions of the federal securities laws require a

showing of scienter on the part of the defendant—that is, a mental state embracing

an intent to deceive, manipulate or defraud. See, e.g., 15 U.S.C. §§77q(a)(1),

78o(c)(1), 78j(b); 17 C.F.R. §240.10b-5. But, even when statutes themselves

contemplate that civil violations can be established with a mental state less than

that of intentional misconduct, courts have nonetheless been reluctant to grant

injunctive relief at the behest of the SEC in the absence of a strong showing that its

proof of a past violation reflects intentional misconduct from which the likelihood

18

See e.g., SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90 (2d Cir.

1978); SEC v. Koracorp Indus., Inc., 575 F.2d 692, 698 (9th Cir. 1978).

19

SEC v. First Fin. Grp., 645 F.2d 429, 434–35 (5th Cir. 1981).

20

SEC v. Randolph, 736 F.2d 525, 529 (9th Cir. 1984).

17

of future violations may be inferred. That is a critical facet of the Supreme Court’s

decision in Aaron v. SEC, 446 U.S. 680.

Aaron addressed whether the SEC must demonstrate that a defendant acted

with scienter if it alleges violations of §§17(a)(2) or (3) of the Securities Act. The

Court explained that, in the first instance, statutory language governs, and held the

SEC need not prove a defendant acted with scienter to establish a prima facie

violation of these provisions. The Supreme Court added, however, that a

defendant’s scienter is still relevant, given the broad discretion possessed by

district judges to deny injunctive relief, even if there is a full evidentiary record

establishing all required statutory elements:

This is not to say, however, that scienter has no bearing at all on

whether a district court should enjoin a person violating or about to

violate §17(a)(2) or §17(a)(3). In cases where the Commission is

seeking to enjoin a person “about to engage in any acts or practices

which . . . will constitute” a violation of those provisions, the

Commission must establish a sufficient evidentiary predicate to show

that such future violation may occur. . . . An important factor in this

regard is the degree of intentional wrongdoing evident in a defendant's

past conduct. . . . Moreover, as the Commission recognizes, a

district court may consider scienter or lack of it as one of the

aggravating or mitigating factors to be taken into account in

exercising its equitable discretion in deciding whether or not to

grant injunctive relief.

446 U.S. at 701 (italicized emphasis in original, bolded emphasis supplied,

citations omitted).

18

Since the Commission is not automatically entitled to obtain injunctive relief

after a full trial on the merits in which it has established every statutory element of

an alleged violation of law, it can only claim such entitlement to injunctive relief

here if it is somehow entitled to a better result where there is no trial on the merits,

as a result of a defendant’s agreement to be enjoined. No authority for such a

position exists, and both parties effectively concede that, when presented with a

consent decree, district courts are not obligated merely to “rubber stamp” the

settlement agreement proffered by the parties.

The district court’s inquiries about the Consent Judgment were germane, and

were posed in furtherance of its task of ensuring that the Agency’s Consent

Judgment satisfied the required standards before approving it—that is, the

settlement is fair, reasonable, adequate, and in the public interest. SEC v. Vitesse

Semiconductor Corp., 771 F. Supp. 2d 304 (S.D.N.Y. 2011); SEC v. Randolph,

736 F.2d at 529.

But, if both parties are willing to enter into the Consent Judgment, that begs

the question: Are there any reasons for the district court to probe beyond the face

of the documents? There are, given the broad nature of the district court’s

equitable powers. These include:

Consenting defendants are often publicly owned, as here.

Management may be willing to settle—especially if not charged or

sanctioned—but management’s interests, and those of corporate

shareholders, are not necessarily congruent;

19

Management’s willingness to settle government allegations, because it

is seemingly expedient, can wreak profound harm upon a corporation

and its shareholders;21

A consent injunction, at least in theory, and often in reality, requires

district courts to preserve their jurisdiction over settled matters, should

issues later arise regarding the construction or enforcement of terms of

the Consent Judgment;22

and

Careful district court scrutiny can avoid later claims by previously

compliant defendants that they really did not understand to what they

were agreeing, or realize the consequences of doing so.

These benefits that emanate from careful district court scrutiny of SEC

proposed settlement agreements are consistent with, and help further, the

objectives and goals the SEC assiduously seeks to serve.

III. THE REVIEW OF THE CONSENT JUDGMENT THE DISTRICT

COURT ATTEMPTED IS NOT NOVEL, AND CAN EASILY BE

SATISFIED BY THE SEC

The invocation of this Court’s jurisdiction by the SEC is premised on its

impression that the district court created a “novel rule” (SEC App. Br. at 58; see id.

21

See, e.g., Barclays Shares Plummet 17% as Rate-Rigging Scandal Threatens

to Engulf More Banks, THE HUFFINGTON POST (UK ed.) (June 28, 2012),

http://www.huffingtonpost.co.uk/2012/06/28/barclays-shares_n_1633687.html

(noting that bank executives involved in the so-called “libor scandal,” other than

Barclays, are seeking a joint settlement to avoid the fate of Barclays’s

management—losing their jobs).

22

See, e.g., SEC Lit. Rel. No. 17534, SEC v. John E. Brinker, Jr., Gary J.

Benz, et al., Civil Action No. IP01-0259 C-H/G (S.D. Ind.) (May 24, 2002)

(announcing court held defendant in civil contempt for violating consent

injunction), http://www.sec.gov/litigation/litreleases/lr17534.htm.



20

at 21)—one characterized as “broad and definitive.” (Id. at 21.) But, the district

court framed no rule, “novel” or otherwise; it applied existing standards to the

specific facts of this case. The “rule” the SEC attributes to the district court is

“that a proposed consent judgment seeking injunctive relief must be supported by

‘proven or acknowledged facts’ . . . or it cannot be approved as reasonable, fair,

adequate, and in the public interest.” ((Id. (emphasis supplied).)23

This new “rule”

allegedly “interferes with the Commission’s allocation of resources, by restricting

its ability to resolve matters by consent judgment and mitigate the risk of trial.”

(Id. at 46). Neither concern is warranted.

A. The District Court Did Not Create Any “Novel” or “Bright-Line

Standard” for Judicial Review of Proposed Consent Orders

The SEC asserts “the district court erred by creating a bright-line rule that a

proposed consent injunction must be rejected unless it is based on facts

‘established by admission or by trials.’” (Id. at 10 (emphasis supplied).) But, the

district court fashioned no such rule. Its Order does not require Citigroup (or any

other settling defendant) to admit or acknowledge the Complaint’s allegations.

Rather, given the inconsistency between the Citigroup and Stoker

Complaints regarding Citigroup’s state of mind when it allegedly perpetrated a

$700 million fraud, the district court held that, applying existing standards to

23

Citigroup echoes this reading of the district court’s Order (Citigroup App.

Br. at 18-49.).

21

the case in hand . . . the proposed Consent Judgment was neither

fair, nor reasonable, nor adequate, nor in the public interest . . .

because it does not provide the Court with a sufficient

evidentiary basis to know whether the requested relief is justified

under any of these standards.

((SPA-8) (emphasis supplied).)24

The district court did not hold it would not (or

could not) approve the Consent Judgment unless Citigroup admitted all allegations

of the Complaint, as the SEC and Citigroup contend. Nor did the district court

hold that it would not or could not approve the Consent Judgment unless Citigroup

admitted liability, as the Motions Panel of the Second Circuit suggested. Instead, it

required some evidentiary-based responses to its inquiries in order to conclude the

Consent Judgment satisfied the applicable four-part test.

That the district court did not create its own test to assess the Consent

Judgment follows from the fact that the SEC does not dispute three of the four

standards applied by the district court—that is, the Consent Judgment must be

found fair, reasonable and adequate. (JA-82 & n.4). As to the fourth standard,

district courts have long been obligated to determine whether a proposed SEC

Consent judgment is in the public interest, SEC v. Randolph, 736 F.2d 525, and, as

the brief submitted in this Court on behalf of the district judge amplifies, that

24

The emphasized words in the text—“the case in hand”—demonstrate the

district court was not purporting to articulate a broad new rule applicable to all

proposed settlement agreements.

22

standard has been held applicable to a host of other agencies. (Dist. Ct. App. Br. at

45 n. 25.)

These four standards are different, and each must be satisfied before a

Consent Judgment can be approved. SEC v. Wang, 944 F.2d 80, 83-85 (2d Cir.

1991);25

U.S. v. Trucking Emp’rs, Inc., 561 F.2d 313, 317 (D.C. Cir. 1977); U.S. v.

Allegheny Ludlum Indus., 517 F.2d 826, 850 (5th Cir. 1975). Taken together, they

reflect a need for careful analysis by a district court before invoking its broad

discretion and imposing injunctive relief.

B. The Questions Posed by the District Court About the Proposed

Consent Judgment, If Answered, Would Have Enabled the

Court to Approve the Settlement

To permit it to assess each of the four standards, the district court issued nine

written questions and held a hearing on the SEC’s and Citigroup’s responses. (See

JA-68–71; JA-198–232.) The district court found the SEC’s and Citigroup’s

responses did not provide a sufficient basis for it to approve the Consent Judgment.

25

In Wang, this Court rejected the SEC’s contention that, under SEC v. Levine,

881 F.2d 1165 (2d Cir. 1989), a court could disapprove a proposed distribution

plan for proceeds in a disgorgement fund only if it were found to be against public

policy or arbitrary. Wang, 944 F.2d at 84. Instead, the Court held that a district

court must also review such a plan for fairness and reasonableness. Id. at 84-85.

Although the SEC cites Wang in this proceeding to support its contention that the

district court should not have reviewed the Consent Judgment under the public

interest standard (SEC App. Br. at 23; see also JA-82 & n.4), Wang does not

support this proposition. Id. at 83-85.

23

For example, the SEC effectively argued that the district court did not need

to consider evidentiary support for any of the Complaint’s allegations because the

SEC’s Complaint is entitled to deference as an expert agency. (JA-79, JA-81–87.)

However, SEC Commissioners do not, except perhaps in truly extraordinary

circumstances, read complaints before they are filed, or review the language in

them; they leave the allegations in Commission Complaints to the Enforcement

Staff.

While the district court acknowledged that it owed “substantial deference” to

the SEC’s determination that the Consent Judgment is in the public interest (SPA-

6), it held such deference did not relieve the court of its own obligation to

“exercise a modicum of independent judgment in determining whether the

requested deployment of its injunctive powers will serve, or disserve, the public

interest.” (SPA-6–7.)

One significant question the district court raised was the disparate mental

states the SEC attributed to the same Citigroup conduct—deeming it negligent in

its action directly against Citigroup, but characterizing it as intentional in the

related Stoker case. (SPA-2.) The parties’ submissions in the district court do not

appear to reconcile this inconsistency. The district court believed this posture

effectively hampered its assessment whether the Consent Judgment was adequate

24

or in the public interest, since it did not know if the alleged conduct was willful or

negligent.

The district court also voiced concern that the victims of Citigroup’s alleged

fraud lost an estimated $700 million, but the Consent Judgment, which would

recoup $285 million from Citigroup, did not commit the SEC to returning any

portion of the $285 million to Citigroup’s alleged victims. (SPA-12.) There

apparently was no substantive response that addressed this concern.

In light of the more serious allegations concerning Citigroup’s knowledge

and intent included in the Stoker Complaint, but omitted from the Citigroup

Complaint, among other things, the district court indicated that it could not simply

“defer” to the SEC’s determination that the Consent Judgment was consistent with

the public interest or that it was fair, reasonable and adequate. (SPA-1–2.)

The district court also explored the disparate treatment accorded Goldman

Sachs as compared to the Consent Judgment’s proposed treatment of Citigroup.

Thus, the district court noted that the SEC settled charges against Goldman Sachs

that seemed less egregious than the fraud allegedly perpetrated by Citigroup.

(SPA-13 n.7.) The district court observed that the SEC had alleged scienter-based

violations against Goldman Sachs and, in settling them, required Goldman to pay a

penalty in excess of thirty times Goldman’s alleged profits on the transaction. (Id.)

In the Citigroup case, the SEC omitted from its Complaint the allegations in the

25

Stoker Complaint suggesting Citigroup acted with scienter, and then argued that

the Citigroup case did not warrant a higher penalty akin to that imposed in the

Goldman Sachs case because the Agency had not alleged that Citigroup had acted

with scienter. (JA-97.)

Under those circumstances, in order to make a determination that a penalty

that was less than half the amount permitted by statute was “fair, reasonable, and

adequate,” and that the issuance of injunctive relief did not “disserve the public

interest,” the district court stated that it “need[ed] some knowledge of what the

underlying facts are.” (SPA-8.)

SEC Commissioners ask the same types of questions, and seek the same

kinds of substantive responses, as the district court attempted here, albeit perhaps

in greater detail. In asking for this information, the district court did not create or

apply a new judicial standard. To the extent the Agency’s responses were deemed

incomplete by the district court, the outcome of the court’s assessment of the

Consent Judgment was effectively preordained.26

26

A jury found Stoker not liable for the violations alleged by the SEC charges.

SEC v. Stoker, No. 11-7388, Dkt. No. 91 (S.D.N.Y. Aug. 6, 2012) (judgment that

the complaint be dismissed), annexed as Exhibit 1.

26

C. The SEC Is Already in a Position to Satisfy the District Court’s

Decision, and Should Not Be Restricted from Resolving

Enforcement Matters Consensually

Before a proposed Consent Judgment is presented to a district court for

approval, the SEC Staff has already performed the two tasks the district court’s

Order here required—it has identified the relevant evidentiary support for the

allegations contained in its complaint, and it has already considered and responded

to most of the questions it is likely to receive from a district judge.

In filing a civil complaint seeking injunctive relief, SEC litigators—like all

litigators—must sign the complaint and, by doing so, certify that they have a

reasonable basis for the contents of the document. FED. R. CIV. P. 11. To satisfy

Rule 11, litigators sort their evidence by reference to the specific allegations in

their complaint. This enables them to ensure that the complaint’s allegations are

each supported by documentary or testimonial evidence.

The work performed preparatory to filing a complaint in district court thus

permits the SEC Staff to identify salient tranches of testimony or documentary

evidence that support their Complaint’s allegations—materials necessary to make a

tailored presentation to a district judge are thus readily available to the SEC’s

Staff, without any significant investment of additional time or energy. In the

instant case, for example, the district court’s questions about the level of intent

behind Citigroup’s alleged misconduct could easily have been satisfied by

27

presenting to the court the evidence that led the Agency to plead a scienter-based

state of knowledge on Citigroup’s part in the Stoker complaint.

The district court did not address what level of factual presentation would be

necessary to obtain its approval of the Consent Judgment, since no evidence was

presented in response to the court’s inquiries. However, precedent provides

examples of how the parties might have responded to the district court’s concerns

without interfering with the SEC’s ability to negotiate settlements, and without

requiring settling defendants to admit any facts whatsoever.

For example, in SEC v. Bank of America Corp., 2010 WL 624581 (S.D.N.Y.

Feb. 22, 2010), the SEC prepared a 35-page Statement of Facts and a 13-page

Supplemental Statement of Facts. At the settlement hearing, counsel for Bank of

America informed the court that it had “no material quarrel with the accuracy of

the facts set forth in the SEC’s Statement of Facts and that the court can consider

those statements of facts as agreed to for purposes of evaluating the settlement.”

Id. at *4 n.2 (emphasis supplied). Similarly, in SEC v. Goldman Sachs, counsel for

Goldman Sachs acknowledged that its marketing materials “contained incomplete

information,” but did not acknowledge any other allegations, and certainly offered

no admissions. SEC v. Goldman Sachs & Co., No. 10-3229, Dkt. No. 25

(S.D.N.Y. July 20, 2010) (judgment), annexed as Exhibit 2.

28

A district court hearing to determine whether to approve a settlement is not a

hearing on the merits of the SEC’s allegations; to the extent the court makes

factual determinations, it does so solely in the context of the fairness, adequacy,

reasonableness and public interest of a proposed settlement, with no binding or

preclusive effect on anyone else in any other proceeding. As a result, defense

counsel can effectively stand mute at such hearings, indicating that they choose not

to contest any of the evidentiary assertions the SEC may make during the course of

the settlement hearing, solely for purposes of that hearing.

The defendants’ acknowledgments in the Bank of America and Goldman

Sachs cases did not collaterally estop either firm from contesting liability in private

investor lawsuits, but did provide the courts considering those SEC settlements

with a sufficient evidentiary basis on which to predicate their grant of injunctive

relief. Alternatively, the SEC could make a proffer of some of the evidence

adduced during its investigation (in camera or otherwise), with the district court

evaluating such evidence for the limited purpose of evaluating the proposed

settlement, but making no findings concerning potential defenses that might be

asserted in subsequent private litigation.

Nothing in the district court’s Order in this case should, therefore, make it

difficult for the SEC to exercise its discretion as to whether to settle any particular

case, or for defendants to settle SEC enforcement actions without effectively

29

admitting to liability in private litigation. Indeed, nothing in the Order that has

spawned this proceeding prohibits or precludes the parties from reaching a new

settlement and presenting a new Consent Judgment to the district court for

approval.27

Under these circumstances, the concern raised by the SEC, Citigroup and

their amici—to wit, that the district court’s Order will make it harder for the SEC

to settle future enforcement actions—is easily resolved, without the draconian

consequences predicted in the briefs they have filed. Equally important, SEC

efforts to conform to the district court’s Order will promote transparency and

improve public and judicial understanding of the impressive efforts expended by

the SEC and its Enforcement Division to promote fairness in our nation’s securities

markets.

CONCLUSION

For the foregoing reasons, should this Court determine jurisdiction exists, it

should affirm the district court’s discretion to decline to enter an injunction in the

27

Moreover, the SEC is not limited to seeking judicial approvals for its various

settlement agreements. The Commission has been given broad cease-and-desist

authority, which can often serve as the effective equivalent of a mandatory

injunction. Securities Enforcement Remedies and Penny Stock Reform Act of

1990, Pub. L. 101-429 §§102, 203, codified at 15 U.S.C. §§77h-1(a), 78u-3(a);

Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203

§929P.

30

absence of an appropriate showing that the Consent Judgment is fair, reasonable,

adequate, and in the public interest.

August 21, 2012 Respectfully submitted,

/s/ Teresa M. Goody

Teresa M. Goody

Kalorama Legal Services, PLLC

1130 Connecticut Ave., NW

Suite 800


(202) 721-0000

[email protected]

Counsel for Harvey L. Pitt,

Amicus Curiae


Certificate of Compliance

This brief complies with the type-volume limitation of Federal Rule of

Appellate Procedure 32(a)(7)(B), the typeface requirement of Federal Rule of

Appellate Procedure 32(a)(5), and the typestyle requirements of Federal Rule of

Appellate Procedure 32(a)(6). This brief contains 6,635 words, excluding the parts

of the brief exempted by Federal Rule of Appellate Procedure 32(a)(7)(B)(iii), and

is prepared in a proportionally spaced typeface (14-point New Times Roman).

/s/ Teresa M. Goody

Teresa M. Goody, Esq.



Suite 800


(202) 721-0000

[email protected]

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on this 29th day of January 2013, a true and

correct copy of the foregoing Brief of Amicus Curiae Former Securities and

Exchange Commission General Counsel and Chairman, Harvey Pitt, in Support of

Affirmance of the District Court’s Ruling was served on all counsel of record in

this appeal via CM/ECF pursuant to Local Rules 25.1(h)(1)&(2). This brief is the

same brief accompanying the Motion for Leave to File Amicus Curiae Brief, which

was filed on August 21, 2012, with minor typographical errors corrected.

/s/ Teresa M. Goody

Teresa M. Goody, Esq.



Suite 800


(202) 721-0000

[email protected]

EXHIBIT LIST

1. SEC v. Stoker, No. 11-7388, Dkt. No. 91 (S.D.N.Y. Aug. 6, 2012)

(judgment that the complaint be dismissed)

2. SEC v. Goldman Sachs & Co., No. 10-3229, Dkt. No. 25 (S.D.N.Y. July 20,

2010) (judgment)

EXHIBIT

1

Case 1:11-cv-07388-JSR Document 91 Filed 08/06/12 Page 1 of 2

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ------------------------------------------------------------)( SECURITIES AND E)(CHANGE COMMISSION,

Plaintiff~

-against-

BRJAN H. STOKER, Defendant.

------------------------------------------------------------)(

II CIVIL 7388 (JSR)

JUDGMENT

The issues in the above-entitled action having been brought on for trial before the Honorable

Jed S. Rakoft: United States District Judge, and a jury on July 16, 2012, and at the conclusion of the

trial on July 31, 2012, the jury having returned a verdict in favor of the defendant, it is,

ORDERED, ADJUDGED AND DECREED: That the Complaint be and it is

hereby dismissed.

DATED: New York, New York August 2 20 12

SO ORDERED

--~~ USDJ r

RUBY J. KRAJICK

Clerk of Court BY:

Deputy Clerk

THIS ocv::::J\1L, 1 WAS ENTERED ON TEE DOCKET ON -----

Case 1:11-cv-07388-JSR Document 91 Filed 08/06/12 Page 2 of 2

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

SEC

Plaintiff(s)

-against-

Brian H. Stoker

Defendant(s)

--------------------------------------------------------)(

Before: Jed S. Rakoff, U.S.D.J. Date: July 16, 2012

Case#: llcv7388 (JSR) Courtroom Deputy: Linda Kotowski Court Reporters:Martha & Patti

AN EXTRACT OF THE MINUTES

Plaintiff(s) by:

Defendant(s) by:

Jeffrey Jnfelise, Esq. US Securities and Exchange Commission 100 F Street NE Washington DC 20549 202-551-4904

Brook Dooley, Esqq "So-.'fl ~K~V-Keker & Van Nest LLP 633 Battery St San Francisco, CA 94111 415-391-5400

A jury trial began on, July 16, 2012, and continued on the following dates: July 17,2012, July 18,2012, July 19,2012, July 23,2012, July 24,2012, July 25, 2012,July 26, 2012, July 27,2012, July 30,2012, July 31,2012 The jury returned with a verdict for the defendant.

8

EXHIBIT

2

Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 1 of 23

UNI1ED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

USDCSDNY DOCUMENT ELECI'RONICALLY FILEr DOC#: DATE FI:;-:LE~D:-:~,...,..,rl-!--

10-CV -3229 (BSJ) V.

GOLDMAN, SACHS & CO. and FABRICE TOURRE,

Defendants.

CONSENT OF DEFENDANT GOLDMAN, SACHS & CO.

1. Defendant Goldman, Sachs & Co. ("Defendant" or "Goldman") acknowledges

having been served with the complaint in this action, enters a general appearance, and admits the

Court's jurisdiction over Defendant and over the subject matter of this action.

2. Without admitting or denying the allegations of the complaint (except as to

personal and subject matter jurisdiction, which Defendant admits), Defendant hereby consents to

the entry of the final Judgment in the form attached hereto (the "Final Judgment'') and

incorporated by reference herein, which, among other things:

(a) permanently restrains and enjoins Defendant from violation of Section

17(a) of the Securities Act of 1933 [15 U.S.C. §77q(a)];

(b) orders Defendant to pay disgorgement in the amount of $15,000,000;

(c) orders Defendant to pay a civil penalty in the amount of $535,000,000

under Section 20(d)(2) of the Securities Act [15 U.S.C. §77t(d)(2)]; and

1


(d) orders Defendant to comply with specified undertakings for three (3) years

from the entry of the Final Judgment.

3. Goldman acknowledges that the marketing materials for the ABACUS 2007-ACI

transaction contained incomplete information. In particular, it was a mistake for the Goldman

marketing materials to state that the reference portfolio was "selected by" ACA Management

LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that

Paulson's economic interests were adverse to CDO investors. Goldman regrets that the

marketing materials did not contain that disclosure.

4. Defendant acknowledges that the civil penalty paid pursuant to the Final

Judgment may be distributed pursuant to the Fair Fund provisions of Section 308(a) of the

Sarbanes-Oxley Act of 2002. Regardless of whether any such Fair Fund distribution is made, the

civil penalty shall be treated as a penalty paid to the government for all purposes, including all

tax purposes. To preserve the deterrent effect of the civil penalty, Defendant agrees that it shall

not, after offset or reduction of any award of compensatory damages in any Related Investor

Action based on Defendant's payment of disgorgement in this action, argue that it is entitled to,

nor shall it further benefit by, offset or reduction of such compensatory damages award by the

amount of any part of Defendant's payment of a civil penalty in this action ("Penalty Offset"). If

the court in any Related Investor Action grants such a Penalty Offset, Defendant agrees that it

shall, within 30 days after entry of a final order granting the Penalty Offset, notify the

Commission's counsel in this action and pay the amount of the Penalty Offset to the United

States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be

deemed an additional civil penalty and shall not be deemed to change the amount of the civil

penalty imposed in this action. For purposes of this paragraph, a "Related Investor Action"

2


means a private damages action brought against Defendant by or on behalf of one or more

investors based on substantially the same facts as alleged in the complaint in this action.

5. Defendant agrees that it shall not seek or accept, directly or indirectly,

reimbursement or indemnification from any source, including but not limited to payment made

pursuant to any insurance policy, with regard to any civil penalty amounts that Defendant pays

pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof

are added to a distribution fund or otherwise used for the benefit of investors. Defendant further

agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any

federal, state, or local tax for any penalty amounts that Defendant pays pursuant to the Final

Judgment, regardless of whether such penalty amounts or any part thereof are added to a

distribution fund or otherwise used for the benefit of investors.

6. Defendant acknowledges that the Court is not imposing a civil penalty in excess

of $535,000,000 based on Defendant's agreement to cooperate as set forth in Paragraph 17

below. Defendant consents that if at any time following the entry of the Final Judgment the

Defendant does not comply in any material respect with its agreement to cooperate, the

Commission may, at its sole discretion with reasonable notice to the Defendant, petition the

Court for an order requiring Defendant to pay an additional civil penalty. In connection with the

Commission's motion for civil penalties, and at any hearing held on such a motion: (a)

Defendant will be precluded from arguing that it did not violate the federal securities laws as

alleged in the Complaint; (b) Defendant may not challenge the validity of the Final Judgment,

this Consent, or any related Undertakings; (c) the allegations of the Complaint, solely for the

purposes of such motion, shall be accepted as and deemed true by the Court; and (d) the Court

may determine the issues raised in the motion on the basis of affidavits, declarations, excerpts of

3


sworn deposition or investigative testimony, and documentary evidence without regard to the

standards for summary judgment contained in Rule 56( c) of the Federal Rules of Civil

Procedure. Under these circumstances, the parties may take discovery, including discovery from

appropriate non-parties.

7. Defendant agrees to comply with the following undertakings, which shall expire

three (3) years from the entry of the Final Judgment herein:

(a) Product Review and Approval

Firmwide Capital Committee. Defendant shall expand the role of its Firmwide Capital

Committee (or any successor committee, the ''FCC") in the vetting and approval process for

offerings of residential mortgage-related securities, including, but not limited to, collateralized

debt obligations that reference such securities (collectively "mortgage securities"). Except as

described below, offerings of mortgage securities by Defendant's Mortgage Department will first

be presented to the Structured Finance Capital Committee (or any successor committee, the

"SFCC"), formerly the Mortgage Capital Committee. If the transaction is approved by the

SFCC, it shall then be presented to the FCC, which, among other things, shall have the right in

its sole discretion to approve or reject any such offerings. The FCC, in its discretion, may direct

that some or all mortgage securities offerings shall be brought directly to the FCC. The FCC

shall ensure that processes are in place so that written marketing materials (as defined below) for

mortgage securities offerings do not include any material misstatement or omit to state a material

fact necessary in order to make the statements made, in light of the circumstances under which

they were made, not misleading.

(b) Role of Internal Legal and Compliance

1. Marketing Materials. All written marketing materials (i.e.,

investor presentations or ''flip books," term sheets, and offering circulars/prospectuses) used in

4


connection with mortgage securities offerings must be reviewed by representatives of

Defendant's Legal Department or Compliance Department. The review process shall also

include a review of the relevant memoranda presented to the FCC/SFCC as part of the approval

process for mortgage securities offerings and all other material terms of the proposed transaction.

Defendant shall establish and maintain a centralized process to record these reviews through

recordation and retention of:

a. The name of each person in the Legal Department or the

Compliance Department who reviewed the materials;

b. The date of completion of review; and

c. A list of the materials reviewed.

2. Internal Audit. On at least an annual basis, Defendant's internal

audit function shall conduct a review to determine that these requirements are being complied

with. Any deficiencies noted by internal audit shall be promptly addressed by Defendant.

(c) Role of Outside Counsel

In offerings of mortgage securities where Defendant is the lead underwriter and retains

outside counsel to advise on the offering, such counsel will be asked to review the term sheets, if

any, the offering circular or prospectus, and the form of any other marketing materials used in

connection with the offering. In order to enhance the effectiveness of its review, outside counsel

will be provided with the relevant FCC and/or SFCC memoranda as background information and

such other documents necessary to reflect all material terms of the transaction.

5


(d) Education and Training

1. Within sixty (60) days following the hiring by, or transfer to,

Defendant's Mortgage Department of new individuals who will be involved with the structuring

or marketing of mortgage securities offerings, each such person shall participate in a training

program that includes, among other matters, instruction on the disclosure requirements under the

Federal securities laws and that specifically addresses the application of those requirements to

offerings of mortgage securities.

2. Not less frequently than annually, each person in Defendant's

Mortgage Department who is involved in the structuring or marketing of mortgage securities

offerings shall participate in a training seminar that covers, among other matters, disclosure

requirements under the Federal securities laws applicable to offerings of mortgage securities.

The first training seminar shall take place not later than sixty ( 60) days following the date of the

Final Judgment.

3. Defendant shall provide for appropriate record keeping to track

compliance with these requirements.

(e) Certification of Compliance by Defendant

The General Counsel or the Global Head of Compliance of Defendant shall certify

annually (one year, two years, and three years, respectively, after the date of entry of this Final

Judgment), in writing, compliance in all material respects with the undertakings set forth above.

The Commission staff may make reasonable requests for further evidence of compliance, and

Defendant agrees to provide such evidence. The certification and any such additional materials

shall be submitted to Kenneth R. Lench, Chief of the Structured and New Products Unit, with a

copy to the Office of Chief Counsel of the Enforcement Division.

6


In addition, Defendant acknowledges that it is presently conducting a comprehensive,

firmwide review of its business standards. This review includes, among other things, an

evaluation of Defendant's conflict management, disclosure and transparency of rrrmwide

activities, structured products and suitability, education, training and business ethics, and client

relationships and responsibilities. The Commission has taken this review into account in

connection with the settlement of this matter.

8. Defendant waives the entry of findings of fact and conclusions of law pursuant to

Rule 52 of the Federal Rules of Civil Procedure.

9. Defendant waives the right, if any, to a jury trial and to appeal from the entry of

the Final Judgment.

10. Defendant enters into this Consent voluntarily and represents that no threats,

offers, promises, or inducements of any kind have been made by the Commission or any

member, officer, employee, agent, or representative of the Commission to induce Defendant to

enter into this Consent.

11. Defendant agrees that this Consent shall be incorporated into the Final Judgment

with the same force and effect as if fully set forth therein.

12. Defendant will not oppose the enforcement of the Final Judgment on the ground,

if any exists, that it fails to comply with Rule 65(d) of the Federal Rules of Civil Procedure, and

hereby waives any objection based thereon.

13. Defendant waives service of the Final Judgment and agrees that entry of the Final

Judgment by the Court and filing with the Clerk of the Court will constitute notice to Defendant

of its terms and conditions. Defendant further agrees to provide counsel for the Commission,

7


within thirty days after the Final Judgment is filed with the Clerk of the Court, with an affidavit

or declaration stating that Defendant has received and read a copy of the Final Judgment.

14. Consistent with 17 C.F.R. 202.5(f), this Consent resolves only the claims asserted

against Defendant in this civil proceeding. Defendant acknowledges that no promise or

representation has been made by the Commission or any member, officer, employee, agent, or

representative of the Commission with regard to any criminal liability that may have arisen or

may arise from the facts underlying this action or immunity from any such criminal liability.

Defendant waives any claim of Double I eopardy based upon the settlement of this proceeding,

including the imposition of any remedy or civil penalty herein. Defendant further acknowledges

that the Court's entry of a permanent injunction may have collateral consequences under federal

or state law and the rules and regulations of self-regulatory organizations, licensing boards, and

other regulatory organizations. Such collateral consequences include, but are not limited to, a

statutory disqualification with respect to membership or participation in, or association with a

member of, a self-regulatory organization. This statutory disqualification has consequences that

are separate from any sanction imposed in an administrative proceeding. In addition, in any

disciplinary proceeding before the Commission based on the entry of the injunction in this

action, Defendant understands that it shall not be permitted to contest the factual allegations of

the complaint in this action.

15. Defendant understands and agrees to comply with the Commission's policy "not

to permit a defendant or respondent to consent to a judgment or order that imposes a sanction

while denying the allegations in the complaint or order for proceedings." 17 C.P.R. § 202.5. In

compliance with this policy, Defendant agrees: (i) not to take any action or to make or permit to

be made any public statement denying, directly or indirectly, any allegation in the complaint or

8


creating the impression that the complaint is without factual basis; and (ii) that upon the filing of

this Consent, Defendant hereby withdraws any papers filed in this action to the extent that they

deny any allegation in the complaint. If Defendant breaches this agreement, the Commission

may petition the Court to vacate the Final Judgment and restore this action to its active docket.

Nothing in this paragraph affects Defendant's: (i) testimonial obligations; or (ii) right to take

legal or factual positions in litigation. or other legal proceedings in which the Commission is not

a party.

16. Defendant hereby waives any rights under the Equal Access to Justice Act, the

Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of law to

seek from the United States, or any agency, or any official of the United States acting in his or

her official capacity, directly or indirectly, reimbursement of attorney's fees or other fees,

expenses, or costs expended by Defendant to defend against this action. For these purposes,

Defendant agrees that Defendant is not the prevailing party in this action since the parties have

reached a good faith settlement.

17. In connection with this action and any related judicial or administrative

proceeding or investigation commenced by the Commission or to which the Commission is a

party, Defendant (i) agrees to require its employees to make themselves available for interviews

at such times and places reasonably requested by the Commission staff; (ii) agrees to require that

its employees testify at trial and other judicial proceedings when requested by Commission staff;

(iii) will produce non-privileged documents and other materials as requested by the Commission

staff; (iv) will accept service by mail or facsimile transmission of notices or subpoenas issued by

the Commission for documents or testimony at depositions, hearings, or trials, or in connection

with any related investigation by Commission staff; (v) appoints Defendant's undersigned

9


attorney as agent to receive service of such notices and subpoenas; (vi) with respect to such

notices and subpoenas, waives the territorial limits on service contained in Rule 45 of the Federal

Rules of Civil Procedure and any applicable local rules, provided that the party requesting the

testimony reimburses Defendant's travel, lodging, and subsistence expenses at the then-prevailing

U.S. Government per diem rates; and (vii) consents to personal jurisdiction over Defendant in any

United States District Court for purposes of enforcing any such subpoena.

18. Defendant agrees that the Commission may present the Final Judgment to the

Court for signature and entry without further notice.

19. Defendant agrees that this Court shall retain jurisdiction over this matter for the

purpose of enforcing the terms of the Final Judgment.

Goldman, Sachs & CoD

By: ~(. "--Gregory K. Palm Managing Director and General Counsel Goldman, Sachs & Co. 200 West Street, 15th Floor New York, NY 10282

On Ju(y llf., ,2010, 0<:50Jlf k.. p~ ,apersonknowntome, personally appeared before me and ackn9~led..ged executing the)'oregoing Consent with full authority to do so on behalf of6al~ (e..L..t~ as its ~ ~

NORMAN FElT NOTARY PUBLIC, State of New York

No 31·5005700 Com ~ali_fied in ~ew York Count.Y..,.....,.

1 miSSIOn Exp1res Dec 14, w.~O

10


Approved as to fonn:

F!f:.-e/! 1='4-rf -Gandalfo V. DiBlasi Karen Patten Seymour Sullivan & Cromwell LLP 125 Broad Street New York, NY 10004 (212) 558-4000 Attorneys for Defendant

11


I

I

BOARD RESOLUTIONS REGARDING SEn"LEMENT

WHEREAS, the Board of Directors (the "Board") of The Goldman Sachs Group, Inc. (the "Corporation") has considered the terms of a potential settlement with the United States Securities and Exchange Commission (the "SEC") relating to the civil enforcement proceeding brought by the SEC with respect to the ABACUS 2007-AC1 COO offering;

NOW, THEREFORE, BE IT RESOLVED, that the Board deems it advisable and in the best interest of the Corporation that the following actions be, and they hereby are, authorized and approved as set forth in the following resolutions:

RESOLVED, that each Authorized Person (as defined below) is hereby authorized to: (1) execute and enter into, on behalf of the Corporation and/or Goldman, Sachs & Co. ("GS&Co."), a Consent to the entry of a Final Judgment in the United States District Court for the Southern District of New York (without admitting or denying the allegations in the SEC's complaint) that, among other things, includes the entry of a permanent injunction against violations of Section 17(a) of the Securities Act of 1933, an order to pay the disgorgement and civil penalties described below, and an order to comply with specified undertakings; (2) waive findings of fact and conclusions of law; and {3) waive the right to a jury trial and the right to appeal from the entry of the Final Judgment as provided in the Consent;

RESOLVED, that each Authorized Person or any of their designees is hereby authorized and directed to arrange for the following payments contemplated by the Consent and the Final Judgment: $15 million in disgorgement and $535 million in civil penalties as provided in the Final Judgment, as well as any other administrative or other fees;

RESOLVED, that each Authorized Person or any of their designees is hereby authorized and directed to take all actions as are necessary, desirable or appropriate to implement the remedial undertakings included in the Consent and the Final Judgment;

RESOLVED, that each Authorized Person or any of their designees is hereby authorized to take all necessary, desirable or appropriate actions to obtain waivers or other appropriate relief from governmental, regulatory and self-regulatory entities and bodies in connection with the Consent and the Final Judgment;

RESOLVED, that each Authorized Person or any of their designees is hereby authorized and directed to execute and deliver in the name of and on behalf of the Corporation and/or GS&Co. or in any other capacity, any and all additional documents or agreements and to take or cause to be taken or to authorize such further action as is necessary, desirable or appropriate in order to carry out any or all of the actions authorized by these resolutions and any action reasonably related thereto;

RESOLVED, that the execution of any document or instrument or the taking of any other action by an Authorized Person or any of their designees shall be conclusive evidence that such action was determined to be necessary, desirable or appropriate by such person and no further evidence of such determination shall be necessary for the purposes of these resolutions;

RESOLVED, that any actions taken by, with the authorization of or at the direction of any Authorized Person or any of their designees prior to the date hereof in furtherance of the actions or transactions authorized by these resolutions, which if taken after the date hereof would be authorized by these resolutions, are hereby ratified, confirmed and approved in all respects; and

NY12S2S:461437.4


RESOLVED, that for purposes of these resolutions, "Authorized Persons" shall mean: anyone with the title of Chief Executive Officer, President, Chief Operating Officer, General Counsel, Chief Financial Officer, Global Head of Compliance, Treasurer or Controller of the Corporation, in each case for so long as such Authorized Person is employed by the Corporation or one of its affiliates.

NY12525:461437.4


THE GOLDMAN SACHS GROUP, INC.

ASSISTANT SECRETARY'S CERTIFICATE

I, Kenneth L. Josselyn, an Assistant Secretary of The Goldman Sachs Group, Inc., a Delaware corporation (the "Corporation"), hereby certify that attached hereto as Annex A are true and complete copies of resolutions duly adopted by the Board of Directors of the Corporation on July 14, 201 0 relating to a potential settlement with the U.S. Securities and Exchange Commission, which resolutions have not been amended, modified or rescinded and remain in full force and effect.

IN WITNESS WHEREOF, I have hereunto·signed my name.

Dated: July 14, 201 0

THE GOLDMAN SACHS GROUP, INC.


UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,

v.

GOLDMAN, SACHS & CO. and FABRICE TOURRE,

Plaintiff,

Defendants.

10-CV-3229 (BSJ)

FINAL JUDGMENT AS TO DEFENDANT GOLDMAN, SACHS & CO.

The Securities and Exchange Commission having filed a Complaint and Defendant

Goldman, Sachs & Co. ("Defendant" or "Goldman") having entered a general appearance;

consented to the Court's jurisdiction over Defendant and the subject matter of this action;

consented to entry of this Final Judgment without admitting or denying the allegations of the

Complaint (except as to jurisdiction); waived findings of fact and conclusions of law; and waived

· I any right to appeal from this Final Judgment:

I.

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendant and

Defendant's agents, servants, employees, attorneys, and all persons in active concert or

participation with them who receive actual notice of this Final Judgment by personal service or

otherwise are permanently restrained and enjoined from violating Section 17(a) of the Securities

Act of 1933 (the "Securities Act") [15 U.S.C. § 77q(a)] in the offer or sale of any security by the

use of any means or instruments of transportation or communication in interstate- commerce or by


use of the mails, directly or indirectly:

(a) to employ any device, scheme, or artifice to defraud;

(b) to obtain money or property by means of any untrue statement of a material fact

or any omission of a material fact necessary in order to make the statements

made, in light of the circumstances under which they were made, not misleading;

or

(c) to engage in any transaction, practice, or course of business which operates or

would operate as a fraud or deceit upon the purchaser.

n.

IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant

is liable for disgorgement of$15,000,000 and a civil penalty in the amount of$535,000,000

pursuant to Section 20(d)(2) of the Securities Act [15 U.S.C. §77t(d)(2)]. Defendant shall satisfy

this obligation by disbursing the foregoing disgorgement and civil penalty pursuant to the Fair

Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002 as follows: i I.

I (a) Defendant shall make a wire transfer in the amount of$150,000,000 payable to I 1\1.3

Deutsche Industriebank AG, a bank based in Dusseldorf, Germany, or such other appropriate

party or parties as the Commission staff may identify in consultation with Defendant prior to

payment ("IKB Party"), within thirty (30) dilys after entry of this Final Judgment. IKB Party

shall be notified, either in the payment or otherwise, of the following: that Goldman is a

defendant in this action; th~ title and civil action number of this action and the name of this

Court; and that the payment is made pursuant to this Final Judgment. Defendant shall

simultaneously transmit a photocopy of such payment and any notification to the Commission's

2


counsel in this action. By making this payment, Defendant relinquishes all legal and equitable

right, title, and interest in such funds, and no part of the funds shall be returned to Defendant.

Defendant shall pay post-judgment interest on any delinquent amounts pursuant to 28 U.S.C.

§1961.

(b) Defendant shall make a wire transfer in the amount of$100,000,000 payable to

the Royal Bank of Scotland N.V. (formerly known as ABN AMRO Bank N.V.), a bank based in

Edinburgh; Scotland, or such other appropriate party or parties as the Commission staff may

identify in consultation with Defendant prior to payment ("RBS Party"), within thirty (30) days

after entry of this Final Judgment. RBS Party shall be notified, either in the payment or

otherwise, of the following: that Goldman is a defendant in this action; the title and civil action

number of this action and the name of this Court; and that the payment is made pursuant to this

Final Judgment. Defendant shall ~imultaneously transmit a photocopy of such payment and any

notification to the Commission's counsel in this action. By making this payment, Defendant

relinquishes all legal and equitable right, title, and interest in such funds, and no part of the funds

shall be returned to Defendant. Defendant shall pay post-judgment interest on any delinquent

amounts pursuant to 28 U.S.C. §1961.

(c) Defendant shall make a payment of$300,000,000 within thirty (30) days after

entry of this Final Judgment by wire transfer, certified check, bank cashier's check, or United

States postal money order payable to the Securities and Exchange Commission. The payment

shall be delivered or mailed to the Office of Financial Management, Securities and Exchange

Commission, Operations Center, 6432 General Green Way, Mail Stop 0-3, Alexandria, Virginia

22312, and shall be accompanied by a letter identifying Goldman as a defendant in this action;

3


setting forth the title and civil action number of this action and the name of this Court; and

specifying that payment is made pursuant to this Final Judgment. Defendant shall

simultaneously transmit photocopies of such payment and letter to the Commission's counsel in

this action. Defendant shall pay post-judgment interest on any delinquent amounts pursuant to

28 U.S.C. §1961. The Commission shall remit the funds paid pursuant to this paragraph to the

United States Treasury.

Amounts ordered to be paid as civil penalties pursuant to this Final Judgment shall be

treated as penalties paid to the government for all purposes, including all tax purposes. To

preserve the deterrent effect of the civil penalty, Defendant shall not, after offset or reduction of

any award of compensatory damages in any Related Investor Action based on Defendant's

payment of disgorgement in this action, argue that it is entitled to, nor shall it further benefit by,

offset or reduction of such compensatory damages award by the amount of any part of

Defendant's payment of a civil penalty in this action ("Penalty Offset"). If the court in any

Related Investor Action grants such a Penalty Offset, Defendant shall, within 30 days after entry

of a final order granting the Penalty Offset, notify the Commission's counsel in this action and

pay the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the

Commission directs. Such a payment shall not be deemed an additional civil penalty and shall

·not be deemed to change the amount of the civil penalty imposed in this Final Judgment. For

purposes of this paragraph, a "Related Investor Action" means a private damages action brought

against Defendant by or on behalf of one or more investors based on substantially the same facts

as alleged in the Complaint in this action.

4


ill.

IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant

shall comply with the following undertakings, which shall expire three (3) years from the entry of

this Final Judgment:

(a) Product Review and Approval

Firm wide Capital Committee. Defendant shall expand the role of its Firm wide Capital

Committee (or any successor committee, the "FCC") in the vetting and approval process for

offerings of residential mortgage-related securitie~,incl_uding, but not limited to, collateralized

debt obligations that reference such securities (collectively "mortgage securities"). Except as

described below, offerings of mortgage securities by Defendant's Mortgage Department will first

be presented to the Structured Finance Capital Committee (or any successor committee, the

"SFCC''), formerly the Mortgage Capital Committee. If the transaction is approved by the

SFCC, it shall then be presented to the FCC, which, among other things, shall have the right in

its sole discretion to approve or reject any such offerings. The FCC, in its discretion, may direct

that some or all mortgage securities offerings shall be brought directly to the FCC. The FCC

shall ensure that processes are in place so that written marketing materials (as defined below) for

mortgage securitie~ offerings do not include any material misstatement or omit to state a material

fact necessary in order to make the statements made, in light of the circumstances under which

they were made, not misleading.

(b) Role of Internal Legal and Compliance

I. Marketing Materials. All written marketing materials (i.e., investor

presentations or "flip books," term sheets, and offering circulars/prospectuses) used in

5


connection with mortgage securities offerings must be reviewed by representatives of

Defendant's Legal Department or Compliance Department. The review process shall also

include a review of the relevant memoranda presented to the FCC/SFCC as part of the approval

process for ·mortgage securities off~rings and all other material terms of the proposed transaction.

Defendant shall establish and maintain a centralized process to record these reviews through

recordation and retention of:

a. The name of each person in the Legal Department or the Compliance

Department who reviewed the materials;

b. The date of completion of review; and

c. A list of the materials reviewed.

2. Internal Audit. On at least an annual basis, Defendant's internal audit

function shall conduct a review to determine that these requirements are being complied with .

. Any deficiencies noted by internal audit sluin be promptly addressed by Defendant.

(c) Role of Outside Counsel

In offerings of mortgage securities where Defendant is the lead underwriter and retains

outside counsel to advise on the offering, such counsel will be asked to review the term sheets, if

any, the offering circular or prospectus, and the form of any other marketing materials used in

connection with the offering. In order to enhance the effectiveness of its review, outside counsel

will be provided with the relevant FCC and/or SFCC memoranda as background information and

such other documents necessary to reflect all material terms of the transaction.

(d) Education and Training

1. Within sixty (60) days following the hiring by, or transfer to, Defendant's

6


Mortgage Department of new individuals who will be involved with the structuring or marketing

of mortgage securities offerings, each such person shall participate in a training program that

includes, among other matters, instruction on the disclosure requirements under the Federal

securities laws and that specifically addresses the application of those requirements to offerings

of mortgage securities.

2. Not less frequently than annually, each person in Defendant's Mortgage

Department who is involved in the structuring or marketing of mortgage securities offerings shall

participate in a training seminar that covers, among other matters, disclosure requirements under

the Federal securities laws applicable to offerings of mortgage securities. The first training

seminar shall take place not later than sixty (60) days following the date of this Final Judgment.

3. Defendant shall provide for appropriate record keeping to track

compliance with these requirements.

(e) Certification of Compliance by Defendant

The General Counsel or the Global Head of Compliance of Defendant shall certify

annually (one year, two years, and three years, respectively, after the date of entry of this Final

Judgment), in writing, compliance in all material respects with the undertakings set forth above.

The Commission staff may make reasonable requests for further evidence of compliance, and

Defendant agrees to provide such evidence. The certification and any such additional materials

shall be submitted to Kenneth R. Lench, Chief of the Structured and New Products Unit, with a

copy to the Office of Chief Counsel of the Enforcement Division.

7


N.

IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that based on

Defendant's agreement to cooperate in this action and any related actions, the Court is not

ordering Defendant to pay a civil penalty in excess of$535,000,000. Defendant's cooperation

shall include those obligations set forth in Paragraph 17 of the Consent, including, but not limited

to, producing non-privileged documents and other materials to the Commission as requested by

the staff; requiring its employees to make themselves available for interviews at times and places

reasonably requested by the staff; and requiring that employees testify at trial and other judicial

proceedings when requested by the Commission's staff. if at any time following the entry of the

Final Judgment the Defendant knowingly provides materially false or misleading information or

materials to the Commission in this action or in a related proceeding, or otherwise fails to

comply in any material respect with its obligations pursuant to Paragraph 17 of the Consent, the

Commission may, at its sole discretion with reasonable notice to the Defendant, petition the

Court for an order requiring Defendant to pay an additional civil penalty. In connection with any

such petition and at any hearing held on such a motion: (a) Defendant will be precluded from

arguing that it did not violate the federal securities laws as alleged in the Complaint; (b)

Defendant may not challenge the validity of this Final Judgment, the Consent, or any related

Undertakings; (c) the allegations of the Complaint, solely for the purposes of such motion, shall

· be accepted as and deemed true by the Court; and (d) the Court may determine the issues raised

in the motion on the basis of affidavits, declarations, excerpts of sworn deposition or

investigative testimony, and documentary evidence without regard to the standards for summary

judgment contained in Rule 56( c) of the Federal Rules of Civil Procedure. Under these

8


circumstances, the parties may take discovery, including discovery from appropriate non-parties.

V.

IT IS FURTHER ORDERED, ADWDGED, AND DECREED that the Consent is

incorporated herein with the same force and effect a8 if fully set forth herein, and that Defendant

shall comply with all of the undertakings and agreements set forth therein.

VI.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that this Court shall retain

jurisdiction of this matter for the purposes of enforc.ing the terms of this Final Judgment.

VII.

There being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil

Procedure, the Clerk is ordered to enter this Final Judgment forthwith and without further notice.

Dated:~.~ ,_2_01 ()

9

Brief of Harvey Pitt - S.E.C. v. Citigroup Global Markets

Documents

Transcript of Brief of Harvey Pitt - S.E.C. v. Citigroup Global Markets