SEC Says It Will Seek Admission of Wrongdoing More Often
By Dave Michaels - Jun 19, 2013 12:01 AM ET
SEC Chairman Mary Jo White said the change in policy would probably apply to cases in which investors were significantly harmed and the alleged fraud was egregious.
The U.S. Securities and Exchange Commission will seek more admissions of wrongdoing from defendants as a condition of settling enforcement cases, the agency’s chairman said.
SEC Chairman Mary Jo White said the change in policy would probably apply to cases in which investors were significantly harmed and the alleged fraud was egregious. The former federal prosecutor said last month she was reviewing the practice of settling cases without requiring defendants to admit misconduct.
“We are going to in certain cases be seeking admissions going forward,” White said yesterday at a Wall Street Journal CFO Network event in Washington. “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.”
The SEC’s practice of settling cases without requiring admissions has been criticized by lawmakers, consumer groups and jurists including U.S. District Court Judge Jed Rakoff, who in November 2011 rejected a proposed $285 million settlement with Citigroup Inc. (C)
Rakoff cited the public interest in learning the truth about SEC allegations that Citigroup misled investors in a $1 billion collateralized debt obligation linked to risky mortgages. In 2009, Rakoff rejected a $33 million agreement between the SEC and Bank of America Corp.
The SEC’s co-directors of enforcement, Andrew J. Ceresney and George S. Canellos, outlined the decision in a letter sent to SEC staff June 17, SEC spokesman Kevin Callahan said.
“We recognize that insisting upon admissions in certain cases could delay the resolution of cases, and that many cases will not fit the criteria for admissions,” Ceresney and Canellos wrote. “For these reasons, no-admit-no-deny settlements will continue to serve an important role in our mission and most cases will continue to be resolved on that basis.”
White said her announcement isn’t intended as a criticism of past SEC practices. The option to settle without admissions of misconduct will remain a “major, major tool in the arsenal,” White said.
The SEC announced in January 2012 that it would require defendants to admit wrongdoing when they have already done so in parallel criminal proceedings.
“This is certainly incremental to that, an expansion of that,” White told reporters after her on-stage remarks. “There may be particular individuals or institutions where it is very important it be a matter of public record that they acknowledge their wrongdoing, and if not you go to trial.”
The SEC’s enforcement division will begin reviewing its pipeline of cases with an eye to determining when an admission of misconduct is appropriate, White said. The SEC won’t apply the new policy to cases already in settlement talks, White said.
White said she sought to review the SEC’s “no-admit, no-deny” practice after observing it as a federal prosecutor and Wall Street defense attorney. As U.S. attorney in Manhattan during the 1990s, White pioneered the use of corporate probation in a white-collar crime case against Prudential Securities Inc.
“You are trying to get as strong a deterrent message out there as you possibly can, and in some situations it can be important that admissions be part of that process,” White told reporters.
Jacob S. Frenkel, a former federal prosecutor and senior SEC enforcement attorney, said the policy will probably affect mostly smaller companies and individuals viewed as “uncontrollable fraudsters.” Big corporations that face major economic consequences from litigation “always will be afforded the opportunity to settle without admitting or denying the allegations,” Frenkel said in a phone interview.
The policy will need to be in practice before people can be sure how it will change things, Frenkel said.
“For certain defendants, it will almost be an invitation to go to trial because the most important carrot in the settlement is the ability to settle without admitting or denying the allegations,” said Frenkel, now a partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. “So everything is going to turn on interpreting where that red zone lies.”
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