While you have been busy decking the halls and such over the past week or so, the SEC's Enforcement Division has been locked in yet another battle with U.S. Judge Jed Rakoff of the SDNY. And this time, things seem to be getting a bit heated.

As you know, on December 15, the SEC appealed Judge Rakoff's order rejecting its proposed settlement with Citigroup to the Second Circuit. The most recent skirmish began on Tuesday of this week, when the Second Circuit granted an emergency motion by the parties to stay the proceedings in the district court case while the appeal was pending, until at least January 17. The New York Times reports that the SEC first asked Judge Rakoff to halt the proceedings temporarily, but he denied the request stating that “it seems patently clear that the parties have no basis for an appeal.”

On Thursday, in the wake of the Second Circuit's decision, Judge Rakoff shot back with another order (details available here) attacking the conduct of both the SEC and Citigroup and asserting that both parties had misled him and the Second Circuit to obtain the stay. According to Judge Rakoff's order:

The SEC asked him to hear its motion for a stay on Dec. 30, but also filed an "emergency motion" with the Second Circuit (unbeknownst to Judge Rakoff) telling the appellate court that the parties could not wait for Judge Rakoff's ruling.

The SEC argued to the Second Circuit that Citigroup faced a January 3, 2012 deadline to file either an Answer or a Motion to Dismiss in the case, and that "if Citigroup files its answer, denying some or all of the allegations in the complaint, or if Citigroup moves to dismiss, challenging the complaint's legal sufficiency, it will disrupt a central negotiated provision of the consent judgment pursuant to which Citigroup agreed not to deny the allegations in the complaint." 

The SEC's emergency motion to the Second Circuit was "materially misleading" in at least four respects: 

(1)....as a legal matter, a motion to dismiss (unlike an answer) does not constitute either an admission or denial; it is a legal challenge to the face of the complaint;" 

(2) "... as a factual matter, the SEC was either already aware that Citigroup was planning to move to dismiss rather than to answer ... or could have readily found this out by calling counsel for Citigroup;" 

(3) "...nowhere in the parties' underlying papers to this court seeking a stay had the parties argued that January 3rd was a critical or even material date;" and 

(4) "... in light of the fact that this court's position was not before the Court of Appeals, the SEC was under a professional obligation to bring to the attention of the Court of Appeals the fact that the Supreme Court of the United States had previously ruled that the denial of the fruits of a settlement does not, without more, provide a basis for interlocutory appeal, let alone a stay."

Although the parties called Jusge Rakoff on Tuesday, December 27, "at no point in that conversation did the parties reveal that the SEC had moved a few hours earlier in the Court of Appeals for an emergency stay or that the 'emergency' purportedly related to the January 3rd filing date."

Judge Rakoff wrote that the purpose of his Thursday's order was both to set the record straight with the Second Circuit, as well as to mandate that "the parties are hereby ordered to promptly notify this court of any filings in the Court of Appeals by faxing copies of any such filings to this court immediately after they are filed in the Court of Appeals."

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