SEC Announces Policy Shift on ‘Neither Admit Nor Deny’ Settlements

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Earlier this week, the Securities and Exchange Commission (SEC) announced a policy shift concerning settled enforcement actions. The SEC has indicated that certain defendants will have to admit wrongdoing as a condition of settlement. Companies will need to be aware of the new policy and may need to consider more seriously the prospect of taking certain cases to trial in light of the serious risks attendant to admitting wrongdoing.

For many years, the SEC has permitted defendants in enforcement actions to enter into settlements in which they “neither admit nor deny” wrongdoing. The use of this language has provided an incentive to defendants—particularly large companies, which face major economic consequences from SEC and private litigation—to settle. The no admit, no deny settlement model has also advanced the SEC’s goals of prompt settlement, litigation avoidance, and resource preservation.

The SEC has faced increasing scrutiny for its use of this settlement model. For example, in his November 28, 2011, opinion in SEC v. Citigroup Global Markets, Inc., Judge Jed S. Rakoff of the Southern District of New York refused to approve a proposed $285 million SEC settlement because Citigroup had not been required to admit to any wrongful conduct. The Citigroup decision has been appealed to the Second Circuit Court of Appeals. On February 8, 2013, both parties argued that Judge Rakoff exceeded his authority in rejecting the settlement. The Second Circuit has yet to issue its opinion.

In light of this criticism, in a January 7, 2012, public statement the SEC altered its settlement policy, but only as it pertained to actions involving parallel criminal convictions, Non-Prosecution Agreements (NPAs), or Deferred Prosecution Agreements (DPAs) that included admissions or acknowledgements of criminal conduct.

When settling with defendants involved in such parallel criminal proceedings, the amended policy no longer permits the inclusion of the “neither admit nor deny” language in the settlement agreements and requires the recitation of the fact and nature of the criminal conviction or criminal NPA/DPA in the settlement documents. The SEC noted, however, that “[t]his policy change does not affect our traditional ‘neither admit nor deny’ approach in settlements that do not involve criminal convictions or admissions of criminal law violations.”

On Tuesday, SEC Chair Mary Jo White announced a further significant policy shift. The SEC now will more frequently require an admission of wrongdoing as a condition of settlement. Although she did not identify specific categories of cases in which defendants would be forced to admit wrongdoing, she explained that the decision will turn on “how much harm has been done to investors [and] how egregious is the fraud.” Ms. White stressed, however, that the no admit, no deny settlement model “is always going to be a major, major tool in the arsenal.”

In view of this new policy and the inherent difficulty that defendants in SEC enforcement actions may face if they admit any wrongdoing, it is unclear how the SEC’s enforcement program will be affected. Ms. White has expressed that the SEC should apply this policy to cases involving egregious misconduct that have led to particularly substantial losses, but this standard presents an obvious tension between encouraging the Enforcement Division staff to pursue settlements of consequence and encouraging investigation targets to force the SEC to prove its cases in court, where findings of liability may be no worse than the settlement terms being offered.