SEC Obtains First Admissions of Wrongdoing Under New Settlement Policy
In our July 2013 edition of this briefing, we reported that in mid-June 2013, SEC Chair Mary Jo White announced a change in the SEC’s settlement policy in enforcement cases. Chair White said at that time 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.”
It has not taken long with the SEC to implement this new policy. The first example was a settlement with New York-based hedge fund adviser Philip A. Falcone and his advisory firm Harbinger Capital Partners. Mr. Falcone admitted as part of the settlement that he had improperly borrowed about $113 million from the fund without telling investors, at a time when he had barred investors from making redemptions. He also admitted that he had favored certain larger investors in connection with redemptions, and that he had tried to manipulate bond markers. As we previously reported, requiring such admissions from a settling defendant is a significant policy departure for the SEC.
The novel settlement in Mr. Falcone’s case set the stage for the latest example of the SEC’s new policy in action, its settlement with JPMorgan Chase & Co. arising out of the so-called “London whale” matter. This matter involved over $6 billion in trading losses amassed by a trader in JPMorgan’s London branch, Bruno Iksil, the “London whale.” In the wake of these trading losses,the SEC accused JP Morgan of “misstating financial results and lacking effective internal controls to detect and prevent its traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses.” In the settlement, JPMorgan agreed to pay $920 million in penalties to various regulators, including a $200 million penalty to the SEC. JPMorgan also admitted to facts supporting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and SEC Rules 13a-11, 13a-13, and 13a-15.
Although the JPMorgan settlement is the largest example to date of the new SEC settlement policy, the admissions may be less damaging to JPMorgan than it would appear, in that violations of these statutes and rules are not ones that allow for private rights of action. Nevertheless, the rollout of the new settlement policy is in keeping with Chair White’s announcement of tougher enforcement by the SEC in a speech she gave on Sept. 26, 2013 entitled “Deploying the Full Enforcement Arsenal.” Her comments also alluded to additional enforcement tools that the SEC will continue to use, such as barring individuals from serving on boards or requiring compliance policy improvements. In addition, she indicated that the SEC would focus more on individuals before “working out to the entity,” meaning that the SEC intends to bring more individuals into enforcement cases.