Slowly but surely the Securities and Exchange Commission seems to be coming around to U.S. District Judge Jed Rakoff’s point of view.
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Earlier this week, the SEC said it plans to require more defendants to openly admit guilt in cases deemed by the SEC to be especially widespread and harmful or particularly “egregious.”
The outspoken Rakoff, a federal judge on the bench in Lower Manhattan, got the ball rolling in this direction. In late 2011 Rakoff famously rejected a $285 million settlement between the SEC and Citigroup (NYSE:C) related to fraud allegations not least because Citigroup wasn’t required under the deal to either admit or deny its guilt.
In no uncertain terms Rakoff blasted the agreement, in effect saying he had no way to determine whether it served the public interest because under the deal’s wording it remained unclear if Citigroup had actually done anything wrong.
Rakoff, intentionally or not, tapped into a broad public sentiment that law enforcement was being too lenient on those whom many perceive as having been some of the biggest contributors to the recent financial crisis.
Other judges, as well as the media and a handful of politicians, have since followed Rakoff’s lead in criticizing huge SEC settlements that don’t require defendants to either admit or deny guilt.
The SEC has clearly taken notice.
In January 2012, shortly after Rakoff blocked the Citigroup deal, the SEC announced that it would no longer allow defendants to neither admit nor deny guilt in settlements where the defendants have already admitted guilt in related criminal cases.
Now the SEC is taking that policy shift a step further.
In an internal memo explaining the latest shift, the SEC justified the use of the ‘no admit/deny’ wording, saying it makes it easier to reach settlements with defendants rather than engaging in long and costly litigation. But some cases will now require an admission of guilt.
“In particular, there may be certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution,” the memo stated.
A 'Lose-Lose' Proposition?
New SEC Chair Mary Jo White told reporters earlier this week that, despite the new policy, most cases would still likely be settled using the old “no admit/deny” language. “This is not a criticism of the past practice and having 'no admit, no deny' settlement protocols in your arsenal as a civil enforcement agency is critically important to maintain,” she said.
Attorney Thomas Gorman, an expert in SEC enforcement, said the new policy could turn into a “lose-lose” proposition for the SEC and all market participants if the regulatory agency isn’t careful about how it’s enforced.
If the SEC is forced into numerous, lengthy litigations because defendants refuse to admit guilt it will siphon off much-needed resources the SEC could otherwise use to police securities markets, Gorman said.
As it stands, it’s “not particularly clear” how the new policy will be applied, the attorney noted.
The origin of the ‘no admit/deny’ policy was to ease the path of settlements that help the SEC achieve its goals of cleaning up the markets, according to Gorman. Allowing defendants to neither admit nor deny their guilt encourages them to cooperate with the SEC rather than fight through prolonged litigation, which helps the SEC do its job.
“Now it will be tougher to settle those cases and there will be less resources for the SEC to do what they need to do,” he said.
Obviously, not everyone agrees with Gorman’s assessment.
“Excellent,” said Chicago-based securities attorney Andrew Stoltmann, who frequently represents investors in fraud cases.
“It is a wonderful development,” Stoltmann said. “The doom and gloom the SEC has claimed for decades would result if this shift was made simply isn’t accurate. The change will help deter fraud and make it easier for civil plaintiffs to recover in cases against these companies.”