One policy change new chairman Mary Jo White has brought to the Securities and Exchange Commission (“SEC”) requires some defendants to admit to wrongdoing if they wish to settle with the agency. It has long been the SEC’s policy in enforcement cases to try to settle litigation rather than go to trial, in order to save time and money, but those settlements, while they resulted in fines and penalties, invariably specified that the defendants “neither admit nor deny” the charges brought against them.
Supporters of the SEC’s old policy claim it protected companies from subsequent shareholder lawsuits, as an admission to the SEC would almost surely result in an easy favorable disposition for plaintiffs in any class action or shareholder derivative suit.
One of the most prominent critics of the policy has been U.S. District Court Judge Jed Rakoff, who in 2011 famously declined to sign off on a settlement the SEC had reached with Citigroup, objecting that “The SEC’s long-standing policy—hallowed by history, but not by reason—of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.”
Rakoff’s stance met with approval from others who felt those responsible for the economic crisis of 2008 were being let off the hook too easily. White acknowledged these concerns with her new policy, saying the SEC would insist on admissions in certain cases.
On Thursday, in a public speech, she noted that defendants would only be willing to make such admissions if they believed the agency would go to trial if they were not forthcoming, adding that “Our new approach could lead to more trials and I welcome that possibility.”
Some have pointed out that large companies that find themselves defending SEC enforcement actions can, if those actions are taken to trial, afford the best civil litigators money can buy; individuals who are more competent and experienced than many SEC attorneys. White brushed off that suggestion, saying the agency’s trial lawyers “are ready to go up against the best of the white-collar defense bar.”
So far, no trials have resulted from application of the new policy. The SEC has, however succeeded in reaching settlements that include an admission of wrongdoing from JPMorgan Chase & Co. in connection with the “London Whale” trading debacle, and from hedge fund manager Phillip Falcone.
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