SEC to Require Admissions of Wrongdoing in Settlements of Most Egregious Cases

U.S. Securities and Exchange Commission (SEC) Chairman, Mary Jo White announced in June 2013 that the SEC will increasingly seek admissions of wrongdoing from defendants in certain circumstances. This represents a significant departure from their long standing policy of permitting defendants to “neither admit nor deny” their actions in settlements of cases. The change in policy is expected to apply to cases where a significant number of investors were harmed and the alleged misconduct was egregious.

The SEC’s practice of settling cases without requiring admission has been criticized by lawmakers, consumer groups and jurists alike including U.S. District Court Judge Jed Rakoff. In November 2011, Judge Rakoff rejected a $285 million settlement that the SEC negotiated with Citigroup because the deal included neither admit nor deny language and due to public interest. Rakoff ruled that because Citigroup did not admit nor deny wrongdoing, there was no means to determine the appropriateness of the settlement size that he was asked to adjudicate on. The SEC has since appealed and the case is pending before a panel of the U.S Second Circuit Court of Appeals.

Since then, a few other judges have taken this point of view. In April 2013, U.S District Judge Victor Marrero in Manhattan held off on final approval of a $602 million insider trading settlement between the SEC and SAC Capital Advisors because of a lack of acknowledgment of wrongdoing by SAC Capital Advisors.

According to SEC enforcement directors George Canellos and Andrew Ceresney, the “admissions could be in the public interest” in certain cases. Typically, these would be cases where the misconduct of defendants might impact a large number of investors, and therefore the admissions of wrongdoing might empower affected investors to establish class action lawsuits against such defendants. Additionally, the very presence of such admissions requirements might mitigate some of the risks of potential wrongdoing by defendants and act as a deterrent. “You are trying to get as strong a deterrent message out there as you possibly can and in some situations it can be important that admissions be part of that process”, White told reporters. However, it is likely that admissions requirements would not affect all cases of wrongdoing across the board, as a matter of practicality. Per Canellos and Ceresney, “We recognize that insisting upon admission in certain cases could delay the resolution of cases and that many cases will not fit the criteria for admissions”. In these cases, the no-admit-no-deny settlements will continue to serve as a significant tool in the execution of SEC policy.

Jacob S. Frenkel, a former federal prosecutor and senior SEC enforcement attorney, believes that this change will affect mostly smaller companies and individuals view as “uncontrollable fraudsters” and that big corporations facing major economic consequences from litigation always will be afforded “the opportunity to settle without admitting or denying the allegations”. Frenkel believes that the policy will need to be in practice before the public can be sure how it will change things.

Kim Lowney contributed to this article.