More on SEC Decision to Require Some Defendants to Admit Misconduct

News Brief

By Cydney Posner

This article from The New York Times provides a bit more color on the SEC Chair's decision to refuse to allow defendants in some cases to settle without admitting wrongdoing.  (See my article of 6/18/13.)

In an interview, Mary Jo White said that admissions "will help with deterrence, and it's a matter of strengthening our hand in terms of enforcement." She did, however, repeatedly emphasize that that "most cases would still be settled under the prevailing ‘neither admit nor deny' standard, which, she said, has been effective at encouraging defendants to settle and speeding relief to victims." "Although she acknowledged that "'Judge Rakoff and other judges put this issue more in the public eye, … it wasn't his comments that precipitated the change….I've lived with this issue for a very long time, and I decided it was something that we should review, and that could strengthen the S.E.C.'s enforcement hand.'" In addition, the author quotes Ms. White as saying that "'our aim is to apply this policy in appropriate cases, and we'll do this in the public interest….Will this lead to more cases going to trial? It's hard to say going in, but it might. We have to be prepared to go to trial, and we have to make people believe we're prepared.'"

In addition, in a memo to the enforcement staff, the co-directors of the SEC's enforcement division said "there might be cases that ‘justify requiring the defendant's admission of allegations in our complaint or other acknowledgment of the alleged misconduct as part of any settlement….Should we determine that admissions or other acknowledgment of misconduct are critical, we would require such admissions or acknowledgment, or, if the defendants refuse, litigate the case.' The article reports that the memo "cites three criteria: ‘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 author of the article contends that "[r]elatively few of the high-profile financial crisis cases, including the big mortgage fraud cases …, would seem to meet those criteria, because the misconduct that was alleged wasn't that egregious, the evidence in some cases was ambiguous, and the victims were limited to a few sophisticated financial institutions rather than large numbers of the investing public." However, Ms. White declined to comment on any specific cases, indicating that "[n]o one case precipitated this. From this point forward, we'll be looking for appropriate cases in which to apply the policy."

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