If you’re reading this, you’re surely aware of the several-years-old-now fight between the SEC and some federal judges regarding the SEC’s policy of settling cases while allowing defendants to neither admit nor deny the claims against them. Very briefly, the SEC contends that its policy allows it to settle cases against companies that would otherwise take on vast liability in follow-on private litigation if it were forced to admit bad conduct that hurt shareholders. Otherwise, the SEC says, the litigation burden would be almost overwhelming. Judge Rakoff, who has sort of led this charge, says the SEC ought to just suck it up. In a 2011 interview, he said, “The U.S. Attorney’s office from the Southern District of New York, which has brought some of the great fraud cases of the last 50 years, has never exceeded 14 human beings in the fraud unit. That’s the unit I was in. The SEC has hundreds, if not thousands, of people.” For what it’s worth, I tend to side with the Commission in this fight.
With that as a backdrop, mild shock waves rolled through the internet on Tuesday when SEC Chair Mary Jo White announced at a Wall Street Journal CFO Network event:
We are going to in certain cases be seeking admissions going forward. To some degree, it can turn on how much harm has been done to investors, how egregious is the fraud. So I think you will see going forward some change in that space.
I do applaud the Commission for taking a whack at tweaking the policy. It is probably healthy for any organization to take external criticism seriously and re-think old policies that may have outlived their usefulness. But I am pretty skeptical about the breadth of what White announced yesterday. She says this will be an “incremental” change to the current policy, it will only apply to “certain” cases, and decisions on when admissions will be required will be made on a case-by-case basis.
I get it. If you’re going to make a change like this, it would be almost impossible to bind yourself ahead of time to conditions that are almost unforeseeable. Sometimes it will seem obvious that an admission should be required in an especially egregious case. But by doing it in this open-ended this way, the SEC is signing on for a lot of second-guessing from the commentariat. Why did they insist on an admission in this case? Why not in that case? The contours of this change may become more clear over the next year or so. In the meantime, it takes thick skin to run an agency like the SEC, and White will need hers going forward. Former SEC Chair Harvey Pitt has some thoughtful comments about this policy shift here.