International - Written by on Tuesday, April 3, 2012 9:42 - 1 Comment

Deferred Prosecution Agreements: A cautionary tale from across the pond : SEC v Citigroup

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By Ben Rose and Nicholas Querée (Ben Rose pictured)

On 20 March 2012, the Solicitor General, Edward Garnier QC, confirmed to Parliament that so-called Deferred Prosecution Agreements (DPAs) are to be added to the armoury of prosecutors in this jurisdiction. This is undoubtedly a welcome announcement, both for prosecutors and defence lawyers.

The details of how these DPAs are to work in practice are as yet unclear. One key issue for the parties will be to what extent Judges in England and Wales will be able to scrutinise these agreements. A significant concern is that prosecutors and defendants will come to agreements which serve their own political and commercial interests at the expense of the public’s. In the United States where such agreements are a long-standing prosecutorial tool a much publicised spat between the Securities and Exchange Commission (SEC), Citigroup, a New York District Judge and now the US Court of Appeal for the Second Circuit has once again thrown these important issues into sharp relief.


On 19 October 2011, the SEC filed an action against Citigroup in the New York District Court alleging securities fraud. The complaint was that Citigroup had marketed to investors a fund holding what the bank knew to be dubious assets. Whilst on the one hand touting the potential of this package of securities to investors, Citigroup had in fact taken a short position against the fund to its own profit.

That same day, the SEC presented to the Court a consent judgment in which Citigroup, although not admitting any of the factual allegations complained of by the SEC, agreed to disgorge itself of the $160m profit it had made from the fund as well as interest and pay a $95m fine. Citigroup also agreed beefed up compliance measures, enforced by the Court and designed to avoid any repetition of the conduct alleged by the SEC which Citigroup had not admitted. The Court was presented with a fait accompli: the parties having settled on the terms of an agreement during the SEC’s investigation.

Judge Rakoff’s Judgment

The Consent Order was presented to New York District Judge Jed S. Rakoff for his approval.  In the United States (as in the United Kingdom) the basic rule is that competent and counselled parties can agree to settle litigation on any terms that they wish. However, the Judge determined that in SEC cases the Court did have a role to play; to ensure that any deal was ‘fair, reasonable, adequate and in the public interest’. With this in mind Judge Rakoff turned to the proposed Order.

The Court held that the proposed Order was ‘neither fair, nor reasonable, nor adequate, nor in the public interest’. How, the Judge asked, could the Court agree to an Order when the question about what Citigroup had or had not done was left entirely unanswered. The parties could have their cake and eat it. The proposed Order purported to allow Citigroup to proceed on the basis that the allegations were unproven and contest any parallel litigation  whilst the SEC could claim that having accepted the fine and disgorgement the defendant had been brought to book for its conduct. This agreement without admissions served only the interests of the parties. As the Judge noted, ‘…if the allegations … are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and most cost of doing business’ (at page 11 of his judgment). The $95m fine agreed by the SEC was ‘pocket change’ to an entity of the size of Citigroup. The only benefit to the SEC was a ‘quick headline’. Rakoff refused to endorse the Order and, seemingly determined to have some findings of fact, instead directed the SEC to proceed to trial.


The SEC and Citigroup promptly appealed, and filed motion to stay the District Court proceedings whilst their appeal was considered. On 15 March 2012 the US Court of Appeals for the Second Circuit (‘the Appeal Court’) handed down its judgment. The Appeal Court noted that, unusually, both parties were united in their opposition to the Judge’s ruling and so directed that independent counsel be appointed to argue the District Court’s position at some later hearing before a differently constituted Second Circuit. This will be heard sometime in September 2012.

Although the Appeal Court was at this stage only required to rule on whether to stay the District Court proceedings pending the outcome of the parties’ appeal, it did take the time express its own views on Rakoff’s judgment. It suggested that the Judge was wrong in his view that the settlement was not in the public interest – in particular, he had failed to afford the proper level of discretion to the statutory regulator charged with making just that decision. ‘The scope’ the Appeal Court argued, ‘of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal’ (see page 8 of the Appeal Court’s judgment). Furthermore, the Judge was wrong to refuse the Order on the basis of the harm it might do to Citigroup without that entities actual liability having been established. Citigroup had received legal advice, and was capable of deciding the matter for itself. In effect, the Appeal Court said, the ultimate decision of whether such an agreement was in the interests of the parties and the public was the body charged by statute with making that decision and the defendant itself. It was not for a Judge.


Lawyers on this side of the pond will await the Second Circuit’s decision with interest. It seems likely that if DPAs are introduced in this jurisdiction both first instance and appellate judges will have to grapple similar issues of where public and private interests lie, and who is best qualified to make those determinations. The comments from Mr Justice Bean in BAE, or Lord Justice Thomas in Innospec serve to confirm that the Courts have not shied away from criticising prosecutors who come to cosy deals with corporate defendants. Those involved in drafting the DPA legislation would be well advised to establish clear guidelines detailing the role of courts in supervising and potentially unpicking prepackaged deals.

The danger is that in not doing so the incoming DPA regime could lose the certainty for prosecutors and defendants which is what makes the proposed scheme attractive to the parties in this type of litigation.

Ben Rose ( is Founding Partner and Nicholas Querée ( a Paralegal at Hickman & Rose Solicitors

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