The SEC’s New Aggressive Tack

by Michael Volkov

maryjoAs a former US Attorney for the Southern District of New York, Mary Jo White promised a new and more aggressive SEC.  She is starting to deliver on that promise.

Reams and reams of client alerts have been sent out by law firms warning of a new policy requiring certain defendants to admit their wrongdoing.  At first glance, it may seem like the policy is more of a distinction without a difference.  But that ignores the ramifications of a corporate admission of wrongdoing in related collateral litigation.  In the end, the new policy reflects a significant change in focus — the SEC is likely to bring more resources and more enforcement actions against wrongdoers.

The new admissions policy is a significant change in policy.  In the past, the SEC has let defendants off with no admission but payment of significant fines.  On a case-by-case basis, the SEC will now require defendants to admit wrongdoing as part of a settlement.   An admission can be used by the Department of Justice, State Attorney Generals and civil plaintiffs against the defendants.  In addition, some insurance policies exclude coverage where a finding of intentional misconduct or fraud has occurred.

In a recent action, the SEC brought out its new policy and applied to its settlement with Philip Falcone and his advisory firm, Harbinger Capital Partners, who agreed to admit to wrongdoing, to pay more than $18 million in penalties and to be barred from the securities industry for at least five years.  Falcone and Harbinger Capital Partners agreed to detailed factual admissions.maryjo3

The SEC’s action provides a first glimpse as to the type of cases the SEC will apply the new policy of admissions.  The SEC has identified some of the factors it will use in deciding which cases to apply the new admissions policy, such as the number of harmed investors or the egregiousness of the fraud.  The bottom line is that the SEC has retained a great deal of discretion in resolving enforcement actions.

The Falcone and Harbinger Capital Partners facts are instructive: Falcone used $113 million in fund assets to pay his taxes; Falcone used a “short squeeze” to manipulate bond prices to favor certain customers; and Harbinger Capital unlawfully bought equity securities in a public offering after having sold short the same securities during a restricted period.   The initial settlement in the case was rejected by the SEC and insisted on a tougher settlement which was filed on August 19, 2013.

The District Court must still approve the settlement but it is likely to do so given the stringent terms negotiated by the SEC.

maryjo5The SEC’s new policy is likely to be applied in upcoming settlements involving banks, hedge funds and other financial institutions.  No longer will settlements with the SEC glide through the approval process with the payment of a fine and a non-admission.

For putative defendants, the new policy can have a dramatic impact on the settlement calculation – the benefits of a settlement may be less and litigation may become a more attractive alternative to settling on the new, admission terms.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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Michael Volkov

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