Securities and Exchange Commission (SEC) Chairman Mary Jo White signaled that the agency will be making a major policy change by requiring the settling party to make admissions in certain cases. At the Wall Street Journal CFO Conference on June 18, White emphasized that the SEC’s longstanding and broadly-applied “no admit, no deny” settlement model benefits the agency, the public and shareholders by efficiently resolving enforcement matters, and that it will always be a major tool in the SEC’s arsenal. However, White said at the conference, “I have reviewed the policy and the practice, and we are going to in certain cases be seeking admissions going forward. Public accountability in particular kinds of cases can be quite important.”
The new policy troubles the securities defense bar, and with good reason. It would give the SEC considerably more leverage in enforcement actions, for one. And more enforcement actions would lead to litigation. Companies would be far less likely to cough up a fine and sign on the dotted line to quickly put enforcement actions behind them if such agreements yielded public admissions of wrongdoing that could fuel follow-on shareholder suits and even criminal actions.
The case is an example of rising judicial scrutiny of the “no admit, no deny” policy. In January, U.S. District Judge John Kane of the District of Colorado rejected an SEC settlement in a Ponzi scheme case because the defendant “remains defiantly mute as to the veracity of the allegations.” And a federal judge in Washington, D.C., in December 2012 rejected a proposed SEC settlement with IBM related to internal Foreign Corrupt Practices Act controls. “I’m not just going to roll over like the SEC has,” Judge Richard Leon said at one point in a hearing in the case.
“If the SEC continues to worry about judges rejecting settlements it reaches that don’t include admissions, it will logically tend to apply its new policy more broadly, so how the 2nd Circuit rules [on Rakoff’s Citigroup order] is still very important,” says Douglas Greene, a shareholder at Lane Powell.