SEC Says Rakoff Erred on ‘Public Interest’ Test for Accords

U.S. Securities and Exchange Commission lawyers said U.S. District Judge Jed Rakoff erred in determining that courts must find its proposed settlements with companies to be “in the public interest” to win approval.

Courts must only find the accords to be “fair, adequate and reasonable,” SEC attorney Andrea Wood told a federal judge in Wisconsin in a filing defending the agency’s proposed settlement with Milwaukee-based Koss Corp. (KOSS), a manufacturer of stereo headphones sued for allegedly making materially inaccurate financial statements for fiscal years 2005 through 2009.

In November, Rakoff in Manhattan rejected Citigroup Inc. (C)’s $285 million settlement with the SEC over claims the bank misled investors in collateralized debt obligations. He had criticized the SEC’s practice of letting financial institutions such as New York-based Citigroup settle without admitting or denying liability, and said in his Citigroup ruling that in cases that touch on the transparency of financial markets, “there is an overriding public interest in knowing the truth.”

“The commission respectfully submits that the district court in SEC v. Citigroup Global Mkt. erred in adding the requirement that a reviewing court also find such judgments to be in the public interest,” Wood said in a filing yesterday. “Nonetheless, in this case, the proposed consent judgments are in the public interest, as well as being fair, adequate and reasonable and therefore satisfy the Citigroup standard.”

SEC’s Claims

In the proposed Koss settlement, Koss and its chief executive officer didn’t admit or deny the SEC’s claims.

U.S. District Judge Rudolph T. Randa in Milwaukee had questioned the adequacy of the SEC-Koss settlement’s provision that the company promise not to violate securities laws in the future. He said the agreement is vague and could pose problems for enforcing it.

The SEC said Koss had “taken substantial remedial actions” to address the internal control failures that led to the SEC’s lawsuit and the agency could submit revised final judgments with more details about the agreement.

Randa also asked the SEC to provide more information to justify the amount Michael Koss will pay to resolve the claims. Under the agreement, Koss would forfeit a total of about $450,000 and 160,000 options, the equivalent of his incentive bonuses for fiscal years 2008 through 2010, according to court filings.

The SEC said the amounts were appropriate and consistent with the requirements spelled out in provisions of Sarbanes- Oxley.

“The proposed settlement as a whole fairly reflects the scope of relief likely to be obtained by the commission if successful at a trial on the merits,” taking into account Koss’s remedial measures, the risks of a trial, the willingness of of Koss and its chief executive to consent to the judgments and other factors, Wood said in the filing.

The case is SEC v. Koss, 11-991, U.S. District Court, Eastern District of Wisconsin (Milwaukee).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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