SEC to Limit Ability to Settle Without Admission of Wrongdoing in Some Cases

News Brief

By Cydney Posner

The Wall Street Journal is reporting  that, at a WSJ CFO Network conference, SEC Chair Mary Jo White said that, while the ability to settle cases without insisting on an admission of guilt remains an important tool, the SEC plans to "require certain defendants to admit to wrongdoing as a condition of settling securities-fraud charges." Ms. White said that the new policy "would apply to only a select number of cases, and suggested they would have to involve allegations of egregious fraud or significant harm to investors." The staff will be developing guidance regarding the types of cases that would require admissions of guilt. The SEC has already changed its long-standing practice by precluding defendants from denying guilt when, at the same time, they have admitted to, or have been convicted of, criminal violations in parallel cases brought by the Justice Department. 

The SEC's long-standing position that allowed defendants in settlements to neither admit nor deny wrongdoing has come under recent scrutiny. For example, in considering the settlement in the Citigroup case, Judge Rakoff issued a blistering criticism of the practice. (See, for example, my articles of 10/27/11, 11/10/11 and 12/15/11.) In addition, the House Financial Services committee had indicated at one time that it was planning to hold hearings to examine the practice. The article reports that another federal judge "questioned the practice in March, saying it is ‘counterintuitive'…. In May, Sen Elizabeth Warren (D., Mass.) said she worried the policy could undercut regulators' ability to crack down on financial fraud."

SEC officials' rationale for the SEC's historic position has been that "pursuing litigation solely to obtain an admission of guilt isn't likely to result in greater penalties, noting that the agency's enforcement attorneys only recommend the commission settle a case when they believe they have negotiated for roughly the same amount in penalties that they could reasonably expect to win at trial. Officials also have cited the agency's limited resources."

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