SEC Chair Mary Jo White Announces Potentially Significant Change to SEC’s Settlement Policy
In a June 17, 2013 internal email to the SEC’s enforcement staff, and then on June 18, 2013 at a conference in Washington, D.C., Securities and Exchange Commission Chair Mary Jo White announced that the SEC would depart in certain cases from its traditional policy of allowing corporate and individual defendants to settle with the agency while neither admitting nor denying the SEC allegations of wrongdoing. Chair White said that, although “neither admit nor deny settlements” would remain the norm, defendants will now be required to admit wrongdoing in “certain cases where heightened accountability or acceptance of responsibility through the defendants’ admission of misconduct may be appropriate, even it if does not allow [the SEC] to achieve a prompt resolution.” The SEC’s co-enforcement chiefs, Andrew Ceresney and George Canellos, added, also on June 18, that defendants might be required to admit violations in cases of “egregious misconduct,” such as cases involving obstruction of the SEC’s investigation or harm to large numbers of investors.
It remains to be seen when, if ever, the SEC will invoke this new policy, which appears to have arisen from skepticism about “neither admit nor deny” settlements expressed by Judge Jed Rakoff in declining to approve a 2011 settlement between the SEC and Citigroup in a financial crisis case, and subsequently by other federal judges and U.S. senators (led by Elizabeth Warren). Defendants (or at least those with defense resources) will obviously be more likely to go to trial against the SEC if settlement means admitting to wrongdoing. This is particularly so because of the impact that such admissions would have on parallel private securities class actions and shareholder derivative cases, the possibility of criminal actions, and the availability of insurance proceeds for indemnity and defense costs. Knowing this, and knowing that financial fraud trials consume tremendous resources, it seems likely that the SEC will insist on admissions only in high profile cases that receive substantial public attention.
Further, although The New York Times reported on June 21, 2013, that “[t]here’s little doubt that extracting admissions of wrongdoing gives the S.E.C. enormous new leverage . . .,” in fact it appears that the SEC would have less settlement leverage in cases where it insists on admissions, because avoiding admissions is a substantial reason many defendants decide to settle rather than fight the SEC. However, the SEC could gain considerable settlement leverage by threatening or implying that it will insist on admissions at a later time in the event the defendant refuses to settle on the SEC’s preferred schedule, such as before the defendant is able to use the discovery process to undermine the SEC’s case. Such a heavy-handed SEC settlement approach was not part of Chair White’s announcement, but the specter that the SEC will engage in this type of bargaining comes with that announcement.
Whether the SEC’s announced new approach to settlement is a fig leaf to appease Congress (to head off any legislative changes that would tie the agency’s hands), or a policy change that will have real impact on the settlement dynamics of SEC enforcement cases, remains to be seen. We will continue to monitor this issue as it develops.