The SEC recently asked Judge Rakoff to compel Citigroup Global Markets, Inc. to produce attorney-client privileged communications concerning a CDO offering. It did so because, in defense to an SEC enforcement action, a banker asserted that he reasonably relied on Citigroup’s internal processes – including its attorneys – to handle the disclosure of information that the SEC claims was misleadingly omitted from the offering documents. In a letter filed Thursday, the parties told the court that they had resolved the issue, but the terms were not disclosed. The parties’ resolution of the motion leaves open an interesting issue. In the underlying case, the SEC charged a former Citigroup employee, Brian Stoker, with failing to disclose material facts in a CDO’s offering circular and pitch book. The SEC alleges that these omissions included Citigroup’s influence over the selection of assets for the CDO and its retention of a proprietary short position in the assets it helped to select. Stoker answered that he “reasonably relied on Citigroup’s institutional processes to ensure adequate review – both legal and managerial – and disclosure of material information, and he cannot be held liable for alleged failings of those processes.”

The SEC, in response, filed its motion to compel Citigroup to disclose otherwise privileged attorney-client communications or, alternatively, to preclude Stoker from asserting his reasonable reliance defense.  The twist here is that Stoker does not appear to be asserting the traditional advice-of-counsel defense – that he sought out and received legal advice and relied on that advice in good faith.  Rather, he seems to be saying that he reasonably understood that the bank’s lawyers and managers were diligently doing their jobs.   But given the parties’ resolution of the motion, Judge Rakoff won’t get a chance to opine on this issue, at least not now. Another intriguing issue:    Does the parties’ letter to the court signify that Citigroup has waived privilege and jurors will get to hear the advice Citigroup’s attorneys provided?  It’s too early to tell, but certainly worth watching, particularly given a recent Bloomberg article reporting that the SEC is focusing on the role of lawyers and considering charges against those who provide legal advice on allegedly fraudulent deals.