- Associated Press - Thursday, March 15, 2012

NEW YORK A federal appeals court said Thursday that a judge likely overstepped his authority when he blocked a $285 million settlement over toxic mortgage securities by calling it bad policy for a regulatory agency to accept a deal that does not include an admission of liability.

The 2nd U.S. Circuit Court of Appeals in Manhattan suspended the effect of Judge Jed Rakoff’s decision to turn down the settlement between Citigroup and the Securities and Exchange Commission until it can fully study the case.

It said there was a “strong likelihood” that Citigroup and the SEC would succeed in overturning Judge Rakoff’s ruling.

In doing so, a three-judge appeals panel noted that Judge Rakoff thought it did not serve the public interest for the SEC to let Citigroup settle without admitting liability.

“It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies,” the 2nd Circuit ruling said. “While we are not certain we would go so far as to hold that under no circumstances may courts review an agency decision to settle, the scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal.”

The appeals court said its preliminary review of facts involved in the settlement lead it to “see no basis to doubt” that the SEC properly considered numerous factors before reaching settlement, including the value of the deal, the likelihood of reaching a better settlement, the risks of proceeding to trial and the public interest.

“In short, we conclude it is doubtful whether the court gave the obligatory deference to the SEC’s views in deciding that the settlement was not in the public interest,” the 2nd Circuit said.

Judge Rakoff in November found the deal inadequate and ordered a prompt trial. Both the SEC and Citigroup appealed.

The settlement came after the SEC had accused Citigroup of betting against a complex mortgage investment in 2007. It said the firm made $160 million in the process while investors lost millions.

Judge Rakoff, an appointee of President Clinton, criticized the deal because it did not require Citigroup to admit wrongdoing.

The appeals court said the appeal raised important questions, including the division of responsibilities between the executive and the judicial branches, as well as the deference a federal court must give to policy decisions of an executive administrative agency when the public interest is at stake.

Robert Khuzami, director of the SEC’s Division of Enforcement, said the SEC was pleased with the ruling.

“As we have said consistently, we agree to settlements when the terms reflect what we reasonably believe we could obtain if we prevailed at trial, without the risk of delay and uncertainty that comes with litigation. Equally important, this settlement approach preserves resources that we can use to stop other frauds and protect other victims.”

Citigroup also said in a statement that it was pleased with the ruling.

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