The court-appointed lawyer for U.S. Senior District Judge Jed Rakoff, John Wing of Lankler Siffert & Wohl, used some strong language to defend Rakoff's rejection of the Securities and Exchange Commission's proposed $285 million settlement with Citigroup in an 89-page brief he filed Monday at the 2nd Circuit Court of Appeals. Citi and the SEC would like to reduce federal judges to "potted plants," Wing wrote, and they filed their joint appeal so the 2nd Circuit would "force (Rakoff) to rubber-stamp their agreement." The SEC, Wing said, "fundamentally mischaracterizes" Rakoff's ruling when it asserts that the judge demanded an admission of liability from Citi. All Rakoff wanted, according to Wing, was enough of an evidentiary record to exercise his constitutionally protected independent judgment and determine whether the settlement was fair, reasonable and in the public interest.

And, according to Wing, Rakoff had plenty of reason to fear the Citi settlement was none of those things. The "anomalous and puzzling" agreement was based on a complaint that accused Citi only of negligence, Wing wrote, despite assertions in the SEC's parallel case against Citi collateralized debt obligation manager Brian Stoker that suggested intentional fraud by the bank. The SEC never disclosed Citi's gross revenue on the supposedly designed-to-fail CDOs at the heart of the case, instead basing the penalty portion of Citi's proposed settlement on the bank's net profits. That was in contrast, according to Wing's brief, to the SEC's use of gross revenue as the basis for Goldman Sachs' $535 million penalty in the Abacus CDO case. "Thus Citigroup's significantly less onerous settlement for similar (indeed, arguably more egregious) misconduct raised legitimate questions," Wing wrote.

I could go on cataloguing Wing's long list of reasons why Rakoff did not abuse his discretion in rejecting the deal, or his account of easy ways the SEC and Citi might have averted the mess (just supplying Rakoff with a detailed statement of facts, akin to that in Bank of America's 2009 settlement, would have done the trick, according to Wing). I co u ld also home in on Wing's intriguing footnote about the evidentiary record established in Stoker's trial, which Wing said (as if in answer to a post I wrote after the Stoker verdict!) would give Rakoff "a better basis for assessing (the SEC's) litigation risk."

But I'm more intrigued by another of Wing's arguments, which could moot all of the debate about the merits of the settlement and whether judges or the SEC have the final responsibility of determining the public's interest in SEC deals. Rakoff's lawyer asserts that the 2nd Circuit does not have jurisdiction to hear the interlocutory appeal. There's something here, as even the appellate panel that was harshly critical of Rakoff's ruling in a preliminary 2nd Circuit decision conceded.

To pursue an interlocutory appeal, Wing said, the parties need to show that Rakoff's order rejecting the settlement, which included an injunction against future violations by Citi, "might result in serious, irreparable harm to the party to whom injunctive relief is denied." (Wing quoted from the 2nd Circuit's 1983 ruling in State of New York v. Dairy Lea.) Under that standard, Wing said, Citi has no standing to appeal, since Rakoff's order didn't deny the bank any injunctive relief. And under the U.S. Supreme Court's 1981 ruling in Carson v. American Brands, the injunctive relief must be at the core of the case, Wing said, which is clearly not true here because Citi is already under a similar no-wrongdoing injunction from a previous SEC settlement. Without any harm from Rakoff's denial of an afterthought injunction, Wing argued, the SEC has no grounds for an interlocutory appeal.

"Indeed, the sole 'harm' to the parties occasioned by the district court's order is that, because their settlement has not been approved, they must either come back to the district court with the evidentiary submission it needs to assess the settlement or else proceed with the litigation," Wing wrote. "This court in Dairylea expressly held that that was not the kind of 'harm' that met the criteria of Carson."

The jurisdictional issue could be an easy out for the 2nd Circuit, which might want to avoid a merits ruling that's critical of Rakoff. (The preliminary ruling, which held that the SEC was likely to prevail on the merits and reversed Rakoff on the issue of a stay, was per curiam, perhaps because none of the appellate judges wanted to criticize their colleague by name.)Wing's brief also holds out the promise that Rakoff now has the evidentiary record he needs to evaluate the settlement -- and the SEC's litigation risk -- because of Stoker's trial. So if the court rejects the appeal and kicks the case back down to Rakoff, the brief implied, he might rule differently.

Oral argument is scheduled for the end of September.

(Reporting by Alison Frankel)

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