Broker-Dealer Litigation - Greenberg Traurig LLP

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SEC v. Kelly, 2011 WL 44331161 (S.D.N.Y. Sept. 22, 2011).
The SEC brought securities fraud charges against defendants alleging that they
engineered transactions that allowed the corporation to improperly report over $1 billion in
revenue from online advertising. After the Supreme Court issued its decision in Janus Capital
Group, Inc. v. First Derivative Traders, --- U.S. ---, 131 S. Ct. 2296 (2011), certain defendants
moved for judgment on the pleadings on the SEC’s claims brought pursuant to Section 10(b) of
the Exchange Act and Section 17(a) of the Securities Act. The SEC conceded that Janus
foreclosed a misstatement claim against certain defendants under subsection (b) of Rule 10b-5
because neither defendant “made” a misleading statement. The same defendants also moved for
judgment on the pleadings on the SEC’s claim brought pursuant to Section 17(a) of the
Securities Act. The defendants argued that because a claim for misstatement liability under
Section 17(a) is treated identically to a claim under Section 10(b), the SEC’s Section 17(a) claim
must also be dismissed on the basis of Janus. The court concluded that although the language of
subsection (2) of Section 17(a), which applies to misstatement liability, is not identical to that of
subsection (b) of Rule 10b-5, because both provisions have “the same functional meaning” with
respect to creating primary liability, Janus applies to Section 17(a)(2) claims as well as Section
10(b) claims. The court stated that it would be inconsistent for Janus to require that a defendant
have actually “made” the misleading statement to be liable under subsection (b) of Rule 10b-5
but not under subsection (2) of Section 17(a).
SEC v. Citigroup Global Markets Inc., 2011 WL 5903733 (S.D.N.Y. Nov. 28, 2011).
The SEC filed a complaint against Citigroup alleging violations of Sections 17(a)(2) and
(3) of the Securities Act over a collapsed $1 billion mortgage-bond fund. According to the
complaint, during early 2007, Citigroup created a billion-dollar fund that sought to “dump” some
toxic mortgage-backed securities on “misinformed investors.” Citigroup allegedly pitched the
Fund’s assets to prospective investors as attractive investments rigorously selected by an
independent investment adviser; however, in reality, Citigroup purposely selected a substantial
amount of negatively performing assets for inclusion in the Fund and then took a short position
in those assets, betting that their value would decline over time. Investors in the Fund lost more
than $700 million, while Citigroup reaped net profits of approximately $160 million.
The same day the complaint was filed, the SEC and Citigroup filed a proposed consent
judgment. Both the SEC and Citigroup asserted that the proposed settlement was “fair,
reasonable, and in the public interest,” and asked the court to approve the proposed settlement.
In response, Judge Rakoff asked both parties to answer several questions concerning the
proposed consent judgment. After receiving responses to the court’s questions and hearing
argument, Judge Rakoff rejected the proposed $285 million settlement between the SEC and
Citigroup and concluded that because the SEC’s standard, boilerplate “neither admit nor deny”
settlement language failed to satisfy the required standard in evaluating such settlements, the
proposed settlement would not be approved. Judge Rakoff concluded that the district court could
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