Last Wednesday, Judge Rakoff explained why, back in February, he denied ex-Citigroup executive Brian Stoker’s motion to dismiss the SEC’s enforcement action against him. As we previously blogged, the SEC has charged Stoker with securities fraud in connection with a CDO that he allegedly helped to create and market. The SEC contends that Stoker failed to disclose to investors that Citigroup influenced the selection of the CDO’s assets and then shorted those assets. Judge Rakoff’s decision is significant in two respects. First, it holds that to state a claim under Section 17(a)(2) of the Securities Act of 1933, the SEC is required to allege only that a defendant “obtained money or property for his employer while acting as its agent” or, alternatively, that the defendant “personally obtained money indirectly from the fraud.” While acknowledging that the case law is “surprisingly sparse, and inconclusive” on this point, Judge Rakoff rejected Stoker’s argument that Section 17(a)(2) requires that a defendant must have personally obtained money or property by means of the alleged misleading statements or omissions.
Continue Reading Judge Rakoff Explains Denial of Ex-Citigroup Executive’s Motion to Dismiss SEC Action
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.”…
Continue Reading SEC Resolves Motion to Compel Attorney-Client Communications Where Defendant Has Asserted Reasonable Reliance Defense