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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 COURTS RULING






Teresa M. Goody
KALORAMA LEGAL SERVICES, PLLC
1130 Connecticut Avenue, NW
Suite 800
Washington, DC 20036
(202) 721-0000

Attorney for Amicus Curiae



i

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 Courts
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 Emprs, 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
DoddFrank 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


1

STATEMENT OF INTEREST OF AMICUS CURIAE
1

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 SECs
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 SECs 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 partys counsel authored this brief in
whole or in part; no party or a partys 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 Agencys 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 Courts 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 courts Order declining to exercise its equitable discretion to approve a
proposed settlement of negotiated enforcement allegations. Undoubtedly, the
SECs 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 Courts jurisdiction in this case is based upon a
mistaken reading of the district courts Orderone that threatens to convert the
district courts fact-specific disposition, affecting only the single case before it,
into a broader rule that, ultimately, could undermine the effectiveness of the SECs
enforcement program. And, the result the SEC and Citigroup urge heredirecting
the district court to enter an injunctionruns counter to the Supreme Courts
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 Courts intervention is unnecessary for the SEC and
Citigroup to achieve their consensual resolution of the SECs 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 courts 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
4

filings, the lawsuits 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 settlementsover
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 courts 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 approvedthat defendants
must admit allegations in SEC Complaints.
But, the district court did not articulate or impose any such rule, nor could it
have done sothe 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 Courts 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 reliefone
against Citigroup (JA-1434),
2
and the other against a former midlevel Citigroup
executive, Brian Stoker. (SA-126; SPA-12.) 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.
6

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 4445, JA-29 46.) Citigroup allegedly realized $160
million in profits, while investors allegedly lost over $700 million. (JA-33 63,
JA-95.) The SECs description of Citigroups 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-3334 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 Citigroups
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-6166.)
7

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-6871), and held a hearing on the parties responses.
(see generally JA-198232.) Among other things, the district court sought
clarification whether Citigroups conduct was knowing and intentional (the
elements of scienter) or negligent. (JA-70, JA-22122, JA-231.) It noted the SEC
alleged identical Citigroup conduct in two conflicting waysagainst Citigroup, it
alleged Citigroup acted negligently, yet against Stoker, it claimed Citigroups same
acts were knowing and intentional. (SPA-23.)
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 actors 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 SECs 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 recidivistfor considerably higher monetary penalties. (SPA-13 n.7.) Absent a
8

factual basis to differentiate Citigroups 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 Judgments fairness. (Id. & SPA-
14.)
The SEC urged that an evidentiary record was unnecessary, asserting its
Complaints allegations were entitled to judicial deference. (JA-79, JA-8187.) In
addition, it argued that the arms-length negotiations leading to the Consent
Judgment warranted judicial approval of the settlement. (SPA-68.)
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-78.) 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 courts Order, and on December 29, 2011, the SEC also
petitioned for a writ of mandamus.
3


3
The Motions Panel left for this Courts 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 SECs 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 SECs 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 Submissiona 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 6273 (Maintaining Investigative Files).

8
As currently staffed, the Enforcement Divisions 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 SECs 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 Staffs
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 2228 (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
Enforcements 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 SECs 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
Enforcements 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 2930 (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 SECs 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 settlements
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-8182 (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 Commissions enforcement program and its policies
regarding settlements.
16
These concerns reflect Agency sensitivity to the public
interest in its enforcement actions. The district courts questionsposed as a
precursor to deciding whether to approve the parties proposed settlementechoed
the kinds of issues the SEC and its Enforcement Division have considered
internally for the entirety of the Agencys nearly eighty-year existence.
Although the Commission explores issues along the same lines as those to
which the district judge sought responses hereperhaps, in more detail and
substanceit is within the district courts broad discretion whether to grant

15
See, e.g., ENFORCEMENT MANUAL, supra n. 6, at 46 (Ranking
Investigations and Allocating Resources); JA-9899.

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 910 (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).
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 circumstancesif 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 Commissions

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 defendantunless restrainedwill 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
conditionsfirst, 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 courts broad discretion.
20
A critical
element of civil litigation involving the antifraud provisions of the federal
securities lawsas is true of the SECs cases against Citigroup and Mr. Stokeris
the alleged wrongdoers mental state.
Many of the antifraud provisions of the federal securities laws require a
showing of scienter on the part of the defendantthat 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, 43435 (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 Courts
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
defendants 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 defendants 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 courts inquiries about the Consent Judgment were germane, and
were posed in furtherance of its task of ensuring that the Agencys Consent
Judgment satisfied the required standards before approving itthat 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 courts
equitable powers. These include:
Consenting defendants are often publicly owned, as here.
Management may be willing to settleespecially if not charged or
sanctionedbut managements interests, and those of corporate
shareholders, are not necessarily congruent;
19


Managements 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 Courts 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 Barclayss
managementlosing 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 Commissions 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 Complaints allegations.
Rather, given the inconsistency between the Citigroup and Stoker
Complaints regarding Citigroups 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 courts 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 courtthat 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 textthe case in handdemonstrate 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 Emprs, 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 SECs and Citigroups responses. (See
JA-6871; JA-198232.) The district court found the SECs and Citigroups
responses did not provide a sufficient basis for it to approve the Consent Judgment.

25
In Wang, this Court rejected the SECs 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 Complaints allegations because the
SECs Complaint is entitled to deference as an expert agency. (JA-79, JA-8187.)
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 SECs 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-67.)
One significant question the district court raised was the disparate mental
states the SEC attributed to the same Citigroup conductdeeming 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 Citigroups 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 Citigroups alleged victims. (SPA-12.) There
apparently was no substantive response that addressed this concern.
In light of the more serious allegations concerning Citigroups 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 SECs determination that the Consent Judgment was consistent with
the public interest or that it was fair, reasonable and adequate. (SPA-12.)
The district court also explored the disparate treatment accorded Goldman
Sachs as compared to the Consent Judgments 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 Goldmans 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 Agencys responses were deemed
incomplete by the district court, the outcome of the courts 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 Courts
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 courts
Order here requiredit 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 litigatorslike all
litigatorsmust 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 complaints 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 Complaints allegationsmaterials necessary to make a
tailored presentation to a district judge are thus readily available to the SECs
Staff, without any significant investment of additional time or energy. In the
instant case, for example, the district courts questions about the level of intent
behind Citigroups 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 Citigroups 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 courts inquiries. However, precedent provides
examples of how the parties might have responded to the district courts concerns
without interfering with the SECs 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 SECs 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 SECs 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 courts 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 amicito wit, that the district courts Order will make it harder for the SEC
to settle future enforcement actionsis easily resolved, without the draconian
consequences predicted in the briefs they have filed. Equally important, SEC
efforts to conform to the district courts 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 nations securities
markets.
CONCLUSION
For the foregoing reasons, should this Court determine jurisdiction exists, it
should affirm the district courts 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);
DoddFrank 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
Washington, DC 20036
(202) 721-0000
Teresa@KaloramaPartners.com

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.
Kalorama Legal Services, PLLC
1130 Connecticut Ave., NW
Suite 800
Washington, DC 20036
(202) 721-0000
Teresa@KaloramaPartners.com



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 Courts 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.
Kalorama Legal Services, PLLC
1130 Connecticut Ave., NW
Suite 800
Washington, DC 20036
(202) 721-0000
Teresa@KaloramaPartners.com



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,

-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
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 2 of 23
(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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 3 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 4 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 5 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 6 of 23
(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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 7 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 8 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 9 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 10 of 23
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.. ,apersonknowntome,
personally appeared before me and executing the)'oregoing Consent with full
authority to do so on behalf as its
NORMAN FElT
NOTARY PUBLIC, State of New York
No 315005700
Com in York Count.Y..,.....,.
1
miSSIOn Exp1res Dec 14,
10
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 11 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 12 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 13 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 14 of 23
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 hereuntosigned my name.
Dated: July 14, 201 0
THE GOLDMAN SACHS GROUP, INC.
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 15 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 16 of 23
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; t h ~ 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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 17 of 23
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 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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 18 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 19 of 23
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 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 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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 20 of 23
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 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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 21 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 22 of 23
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
Case 1:10-cv-03229-BSJ-MHD Document 25 Filed 07/20/10 Page 23 of 23
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.
,_2_01 ()
9