The SEC Blinks and Agrees to Change its Settlement Policy, Sometimes

United States District Court for the Southern District of New York

Coming off of the recent multimillion dollar settlement, which the courts refused to approve in part because the plaintiff neither admitted nor denied the charges, the Securities and Exchange Commission (SEC) has announced that it will stop letting defendants settle civil charges in which they “neither admit nor deny” guilt when the civil litigation is accompanied by parallel criminal litigation where the same defendants actually do admit guilt.

On January 6, the Commission’s Enforcement Director Robert Khuzami put it this way:

The new policy does not require admissions or adjudications of fact beyond those already made in criminal cases, but eliminates language that may be construed as inconsistent with admissions or findings that have already been made in the criminal cases.

In the case that brought this issue to a head, a U.S. District Judge said the SEC’s policy of allowing settling defendants to neither admit nor deny allegations made it hard for judges to determine whether the settlements they are asked to approve are justified by the facts. In the case in point, only civil charges were brought; there was no related criminal case.

Applies Only to SEC Cases With Parallel Criminal Charges

While the change in policy will take effect right away, it won’t apply to the Citigroup case — or even to most SEC settlements. It will affect only those SEC cases which have parallel criminal charges in which the company or person admits guilt in resolving the criminal charges.

It therefore remains to be seen how much of an impact the change will have.

When defendants admit to criminal charges, which carry greater potential penalties than civil allegations, they are already exposing themselves to increased civil liability in shareholder lawsuits. Having to admit guilt in related civil litigation involving the SEC which arises from the same set of facts shouldn’t worsen the situation. But it’s hard to see how this change is going to help judges in reviewing the majority of civil settlements.

The SEC says it has been considering the change since last spring.

We haven’t crossed this bridge, but we’ve certainly come to it…

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
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2 Responses to The SEC Blinks and Agrees to Change its Settlement Policy, Sometimes

  1. Nina Werstein says:

    Corporations are run by people who are clearly identified by their position/title. Corporations cannot be made immune from punishment because of its name and size. When corp. policy led to mortgage fraud, junk securities that are known to fail, etc., it’s the PEOPLE at the top of the corporations who wrote and followed those policiies and must be punished as individuals! The paper and electronic Evidence should be what determines fault or not. Not the corporation saying they will admit (or not admit) to wrongdoing. That’s the SEC asking, “So, are you guilty or not?” The SEC needs some stronger and smarter people running it for the good of the collective public. They are tip-toeing in favor of corps. way too much. Please SEC, indict and punish the people in the corps. (like the banks, citigroup, ect) or the problems will not go away. People will continue to hide behind the brand.

    • Ann Longmore says:

      Nina, the tension that you have identified between the corporate person as a defendant and the very human person who is an employee or executive of a corporation, is one that the courts and the regulators are actively struggling with at the current time — including Judge Rakoff in an earlier decision of his where he took the SEC to task over the fact that there were no individual defendants and only the corporation.

      That said, in a number of financial crisis suits where the SEC has gone after individuals (admittedly, not big fish, but those) directly involved in the alleged fraud, they have lost. So the balance, can be a difficult one to achieve.

      We do have the sense, however, that a change in enforcement patterns is underway. So stay tuned and thank you for your thoughtful comment.

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