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Thomas O. Gorman,
Dorsey and Whitney LLP
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  • Disclaimer:

    Policy


    SEC to Require Admissions to Settle in Some Cases

    The SEC is making a significant change to its Enforcement program which could impact any company or person settling an enforcement action as well as the program of the agency. SEC Chair Mary Jo White stated that the agency is going to change the way it settles enforcement actions, modifying its much criticized “neither admit nor deny” policy. Now, in select cases, the Commission will require that admissions be made as a condition of settling rather than permitting the defendant to “neither admit nor deny” the allegations in the complaint of its enforcement action.

    The new policy will apply only in select cases, such as those where there is egregious conduct and/or wide spread public interest, according to Ms. White. The precise parameters of the new policy were not specified. The new SEC Chair did note that the new policy would be applied on a case by case basis. For most settling cases the current policy would still apply.

    Traditional policy

    The neither “admit nor deny” policy traces its roots to the early days of the SEC’s Enforcement Division in the 1970s. Under the policy settling defendants can resolve a Commission enforcement action by admitting to the jurisdiction of the court but neither admitting nor denying the typically detailed allegations of wrongful conduct in the agency’s complaint. While this permits settling defendants to avoid admitting liability it does not permit them to deny it. To the contrary, under Commission policy settling defendants are not permitted to deny the allegations of wrong doing asserted in the complaint. Thus, under the current policy the public is informed of the SEC’s views of the conduct in the complaint, but unlike a criminal case where there is a guilty plea, there is no admission by the settling person that those claims are correct.

    Last year the Commission modified its policy, indicating that where there is an admission or adjudication of guilt the neither admit nor deny policy would not apply. Rather, admissions would be required. This would typically occur where there is a parallel criminal action in which the person pleaded or was found guilty. To date this modification has been applied on an inconsistent basis.

    The SEC’s traditional policy is designed to facilitate settlement while permitting the agency to achieve its statutory goals. If defendants are required to make admissions of guilt, it can open them to significant additional liability in parallel civil damage actions. For corporate defendants this can result in millions of dollars in potential liability, making them understandingly reluctant to settle. Individuals may face the same liability and the added difficulty of losing D&O coverage which often pays the legal fees for corporate officers – a benefit which can be lost if the person is found to have engaged in certain wrongful conduct. Avoiding these difficulties can facilitate settlement to the benefit if the Commission.

    Facilitating settlement has long been key to the SEC’s Enforcement program. Not only does it permit the agency to conserve its scare resources, but also to achieve its goals. The statutory mandate of the Commission is to protect investors by, in part, halting fraudulent conduct and preventing its reoccurrence. The SEC has an array of tools when settling a case which it can use to protect investors in the future. Those range from its traditional injunction prohibiting a repetition of the conduct to equitable remedies such as installing procedures to protect against future transgressions. They can also include disgorgement to take the profit out of wrong doing and monetary penalties as well as bar orders which can preclude the person from being a corporate director or officer or being in the securities business.

    Impact of new policy

    The new policy may respond to critics of the agency while undermining its ability to fully conduct its mission, depending on how it is administered. In announcing the policy Ms. White gave little definition to how the new required admission policy would work. While she noted it would be applied in egregious cases those would appear to fall within the existing policy since that type of conduct can result in criminal charges. On the other hand, if it is only applied to those where there is “widespread” public interest, it is at best unclear how it would be administered. For example, in declining to enter the SEC’s proposed settlement in its market crisis action against Citigroup, the court noted that there was wide spread interest in the case when criticizing the neither admit nor deny policy. At the same time the agency chose not to charge intentional wrongdoing but only negligence despite factual allegations which the court described as serious. Requiring admissions of wrongdoing under such circumstances would seem incongruous at best.

    If the new policy is applied to any significant number of cases, and actual admissions of wrongdoing are required as in a criminal guilty plea — as opposed simply admitting an error as in the SEC’s settlement with Goldman Sachs — the policy could undermine the ability of SEC Enforcement to fully implement its statutory obligations. While Ms. White stated in announcing the policy that it would not cause delay, achieving that result seems at best problematic. If corporate or individual defendants are going to be asked to admit the detailed allegations of wrong doing typically made in an SEC Enforcement complaint, it us not unreasonable to expect that demands will be made to analyze the underlying evidence. Not only could this take a considerable amount of time, it is something the agency is typically very reluctant to permit at the Wells stage when most cases are settled. If it causes the settlement process to break down this can only mean that more potentially large and complex actions are heading for trial. All of this would tax the resources of the agency and limit the number of other investigations and cases it can handle.

    In the end the new policy may be a lose lose for everyone. Defendants in SEC enforcement actions may find themselves litigating complex and difficult actions at great expense to avoid the collateral consequences of potential liability in civil damage actions and perhaps the loss of D&O coverage. The SEC may be forced to prioritize its case load, picking and choosing the investigations and actions which will be pursued but ignoring others. That could effectively undermine the mission of the agency’s enforcement program.

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