In Brief

• More defendants in cases brought by the Securities and Exchange Commission will face the possibility of making an admission of misconduct under a change in the policy on “no admit, no deny” settlements.
• The SEC’s perceived need to create public accountability is driving this change.

The Securities and Exchange Commission (“SEC”) has changed its policy concerning “no admit, no deny” settlements to require admissions of misconduct in some settlements. SEC officials have attributed the change to the public’s demand for acceptance of responsibility and accountability in some enforcement cases. While the SEC will continue its traditional practice of entering into no admit, no deny settlements, the SEC will now require some settlements to include admissions of misconduct.

Speaking at an event last month that was covered by the Bloomberg BNA White Collar Crime Report, SEC Enforcement Division Director Andrew Ceresney said that requiring an admission of misconduct “allows for something of a public catharsis, and the public is left with no reason to doubt the facts alleged, and the message of the case is unambiguous and unequivocal.” In a June 2013 article in The New York Times, the recently confirmed chairwoman of the SEC, Mary Jo White, said at a separate event, “There’s no question I share the desire for more accountability in cases where that is warranted. I do think there are situations where public accountability is particularly important, and that will be our focus. I don’t want to overstate this – no admit, no deny will still be the way most cases are resolved – but I think it’s an important change.”

Exemplifying this new approach is a recent consent agreement between the SEC and Harbinger Capital, a hedge fund led by Andrew Falcone. Although the parties had originally agreed to a no admit, no deny deal, it was rejected by a majority of the SEC’s commissioners in July. As part of a revised agreement, Falcone and Harbinger had to admit to wrongdoing and pay penalties of $18 million, and Falcone is barred from the securities industry for five years.

Exactly which cases, and how many, will result in admissions of wrongdoing remains to be seen. But an internal SEC enforcement memo discussing the policy change cites three criteria where the SEC may insist that a company admit wrongdoing: “misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm;” “egregious intentional misconduct;” or “when the defendant engaged in unlawful obstruction of the commission’s investigative processes.”

The policy change follows years of criticism that the SEC has been too lenient, especially with large institutions that were at the center of the financial crisis. Bank of America, Goldman Sachs, Citigroup and JPMorgan Chase were among the defendants that settled charges related to the financial crisis while neither admitting nor denying guilt, although Goldman was required to admit that its marketing materials were incomplete.

Some of the fiercest criticism has come from the courts. We have written previously here about Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York, who ruled in late 2011 that he couldn’t assess the fairness of the SEC’s settlement with Citigroup in a complex mortgage case without knowing what, if anything, Citigroup had actually done. (See story here.) In his ruling, he said that settling with defendants who neither admit nor deny the allegations is a policy “hallowed by history but not by reason.” Judge Rakoff described the settlement – for $285 million – as “pocket change” for a giant bank like Citigroup. Other judges have followed Judge Rakoff’s lead, and an appeal of his Citigroup ruling is pending before the Court of Appeals for the Second Circuit.

The SEC is not alone in the way it settles enforcement actions. Like other federal regulatory agencies, the SEC has historically settled all its cases on a no admit, no deny basis. According to Ceresney in the Bloomberg report, “ … the SEC has been incredibly successful in achieving great settlements with this policy. In the majority of cases, settling on a no admit, no deny basis makes good sense, as the policy provides swift remedies for misconduct and quick relief to investors while allowing the commission to conserve its precious resources and avoid litigation risk.”

Even so, White, Ceresney, and other SEC officials reviewed that approach to settlements. Ceresney said in the Bloomberg report that the agency “concluded that there are some cases where the need for accountability and acceptance of responsibility is so important that we should be demanding admissions or else pursuing those cases to trial. In other words, an admission should be an indispensable element of the settlement.”

And if a company refuses to concede wrongdoing, the SEC professes to be ready to go to trial. “The possibility of more litigation does not deter us… . If we end up litigating more frequently we will shift our resources as necessary… and we are more than willing to try cases if need be,” Ceresney said in the Bloomberg report.

There’s little doubt that extracting admissions of wrongdoing gives the SEC new leverage, and not just because defendants want to avoid the damage to their reputation that comes with admitting misconduct. Private litigants in civil lawsuits will likely seize upon any admission, with potentially devastating financial consequences. If a company admits culpability to the SEC, plaintiffs in private shareholder litigation could use such an admission to reap hundreds of millions or billions of dollars in damages. These considerations can impact the strategic calculus for many corporations and individuals who are negotiating with the SEC, and Saul Ewing’s White Collar and Government Enforcement Practice will continue to track the SEC’s approach in these cases and keep you informed.