On June 18, 2013, in comments to the Wall Street Journal CFO Network Conference in Washington, D.C., SEC Chairman Mary Jo White announced that the Securities and Exchange Commission will begin to press for admissions of liability from registrants who engage in egregious fraudulent actions that significantly harm investors.1 While reiterating the importance of the Commission's "no admit, no deny" settlement model for the majority of enforcement actions, Chairman White announced that the SEC will be "seeking admissions going forward" in certain cases.2 In a memo to SEC staff the same week, the current co-directors of the Enforcement Division elaborated that admissions may be sought in cases that include "misconduct that harm[s] large numbers of investors. . . particularly when the defendant engage[s] in egregious intentional misconduct; or when the defendant engage[s] in unlawful obstruction of the commission's investigative processes."3 This new policy and other recent developments suggest that the SEC will seek greater accountability in future settlements.
Settlements play a critical role in the SEC's enforcement program. The SEC handles a large caseload with relatively limited resources, and yet has maintained more than a 90% success rate.4 Much of that success is attributable to the Commission's reliance on settlements. On average, each year the SEC settles almost 700 cases while litigating fewer than fifteen.5 From the SEC's perspective, settling rather than litigating violations of securities laws achieves the Commission's goals of accountability, deterrence, investor protection, and compensation to harmed investors in the broadest and most efficient manner possible given its resource constraints.6
Since the establishment of the SEC's Division of Enforcement in 1972, the SEC's settlements typically have not included any admission or denial of wrongdoing.7 The "no admit, no deny" policy encourages corporations to settle because it allows a corporate defendant to forego time-consuming and expensive litigation while simultaneously avoiding the reputational harm and collateral consequences that would come from an admission of wrongdoing. On the latter, the policy provides charged corporations liability protection because: 1) if the corporation litigates and loses, issue preclusion could mean almost automatic additional liability in the inevitable subsequent suit by private plaintiffs and 2) although an admission of wrongdoing in a settlement does not satisfy the requirements for issue preclusion, the admission nonetheless could provide substantial negative evidence in any future private suit.8
Although the "no admit, no deny" policy is seemingly preferred by both the SEC and defendants, its value to the investing public recently has come under scrutiny. Most notably, in the widely discussed 2011 case SEC v. Citigroup, Judge Rakoff refused to approve the SEC's settlement with Citigroup that contained the "no admit, no deny" language, reasoning that it failed to serve the public interest.9 He opined that while "the policy of accepting settlements without any admissions serves various narrow interests of the parties," it left "defrauded investors substantially short-changed."10 Judge Rakoff wrote that the monetary penalties imposed on Citigroup without any admission of wrongdoing represented merely "the cost of doing business imposed by having to maintain a working relationship with a regulatory agency."11 He pointedly questioned what the SEC gained from the no-admission settlement besides a "quick headline."12
Although the SEC's settlement with Citigroup ultimately appears to be headed for judicial approval in the Second Circuit,13 Judge Rakoff's opinion sparked debate about the SEC's longstanding "no admit, no deny" settlement model. Expressing similar concerns about the public interest, the House Financial Services Committee held a hearing regarding "no admission" settlement policies of civil enforcement agencies.14 In apparent response to the scrutiny, the SEC's then-Director of Enforcement, Robert Khuzami, announced on January 6, 2012 that the SEC would be removing the "neither admit nor deny" language from settlements for which there is a parallel criminal conviction or a non-prosecution or deferred prosecution agreement that included admissions or acknowledgements of criminal conduct.15 Khuzami stated that the policy change was the result of a staff review and discussions with the commissioners in recent months and refuted any question that the change was due to Judge Rakoff's Citigroup decision.16 Regardless, the policy revision represented a significant shift away from the "no admit, no deny" settlement model criticized by Judge Rakoff.
Chairman White's recent comments combined with the above-mentioned Division of Enforcement memorandum indicate that the SEC will go one step further and seek admissions in cases outside of the parallel criminal investigation context. However, it is important to remember that the SEC remains resource limited. Excluding the "neither admit nor deny" language from settlements will lower significantly the incentive of registrants to settle, possibly requiring the SEC to litigate more cases. Moreover, many of the SEC's settlements contain allegations that would be exceedingly difficult for the SEC to prove at trial. For instance, complicated accounting cases often involve difficult judgment calls, which experts may debate. Further, cases involving foreign witnesses and evidence would pose challenges to the SEC, an agency that is not accustomed to litigating cases. As such, and consistent with the SEC's communications, the Commission likely is to reserve requiring admission to a handful of cases involving egregious and intentional misconduct by senior executives that causes significant harm to investors or third parties.
* Bradley J. Bondi is a partner in the Business Fraud Complex Litigation Group and leads the SEC Enforcement and Investigations practice at Cadwalader, Wickersham & Taft LLP. Partners Ray Banoun and Peter Clark and summer associate Robert Duncan provided significant input on this article.
1 Securities and Exchange Commission: Wall Street Journal CFO Network Conference, C-SPAN (June 25, 2013),
3 Kara Scannell, SEC Considers Policy Shift on Admissions of Wrongdoing, FINANCIAL TIMES (June 19, 2013), www.ft.com/cms/s/0/7a93d5dc-d882-11e2-b4a4-00144feab7de.html#axzz2XFBmhKx9.
4 Securities and Exchange Commission, FY 2011 Performance and Accountability Report 61 (2011), available at www.sec.gov/about/secpar/secpar2011.pdf.
6 Khuzami Defends SEC Settlement Policies on Capitol Hill, SEC TODAY (CCH), January 10, 2012 [hereinafter Khuzami].
8 See Ross MacDonald, Setting Examples, Not Settling: Toward a New SEC Enforcement Paradigm, 91 Tex. L. Rev. 419, 432 (2012).
9 S.E.C. v. Citigroup Global Mkts. Inc., 827 F. Supp. 2d 328, 335 (S.D.N.Y. 2011); see also Bradley Bondi & Douglas Fischer, Citigroup Ruling Has Serious Implications for SEC Settlements, JURIST - SIDEBAR, (Jan. 16, 2012), www.jurist.org/sidebar/2012/01/bondi-fischer-sec-citigroup.php.
10 Citigroup, 827 F. Supp. 2d at 333-34 (emphasis in original).
11 Id. at 333.
13 The Second Circuit granted a stay from the District Court's order for a prompt trial after refusing to approve the settlement and held that the SEC had a strong likelihood of success in its appeal. See U.S. S.E.C. v. Citigroup Global Mkts Inc., 673 F.3d 158 (2d Cir. 2012).
14 The hearing was announced on December 11, 2011 and subsequently held on May 17, 2012. See Examining the Settlement Practices of U.S. Financial Regulators, 112 Cong. 112-28 (2012).
15 Khuzami, supra.