SEC Says It Will Seek Admission of Wrongdoing More Often

SEC Says It Will Seek Admission of Wrongdoing More Often

By Dave Michaels – Jun 19, 2013

The U.S. Securities and Exchange Commission will seek more admissions of wrongdoing from defendants as a condition of settling enforcement cases, the agency’s chairman said.

SEC Chairman Mary Jo White said the change in policy would probably apply to cases in which investors were significantly harmed and the alleged fraud was egregious. The former federal prosecutor said last month she was reviewing the practice of settling cases without requiring defendants to admit misconduct.“We are going to in certain cases be seeking admissions going forward,” White said yesterday at a Wall Street Journal CFO Network event in Washington. “To some degree, it can turn on how much harm has been done to investors, how egregious is the fraud. So I think you will see going forward some change in that space.”

The SEC’s practice of settling cases without requiring admissions has been criticized by lawmakers, consumer groups and jurists including U.S. District Court Judge Jed Rakoff, who in November 2011 rejected a proposed $285 million settlement with Citigroup Inc. (C)

Rakoff cited the public interest in learning the truth about SEC allegations that Citigroup misled investors in a $1 billion collateralized debt obligation linked to risky mortgages. In 2009, Rakoff rejected a $33 million agreement between the SEC and Bank of America Corp.

Staff Informed

The SEC’s co-directors of enforcement, Andrew J. Ceresney and George S. Canellos, outlined the decision in a letter sent to SEC staff June 17, SEC spokesman Kevin Callahan said.

“We recognize that insisting upon admissions in certain cases could delay the resolution of cases, and that many cases will not fit the criteria for admissions,” Ceresney and Canellos wrote. “For these reasons, no-admit-no-deny settlements will continue to serve an important role in our mission and most cases will continue to be resolved on that basis.”

White said her announcement isn’t intended as a criticism of past SEC practices. The option to settle without admissions of misconduct will remain a “major, major tool in the arsenal,” White said.

Pipeline Review

The SEC announced in January 2012 that it would require defendants to admit wrongdoing when they have already done so in parallel criminal proceedings.

“This is certainly incremental to that, an expansion of that,” White told reporters after her on-stage remarks. “There may be particular individuals or institutions where it is very important it be a matter of public record that they acknowledge their wrongdoing, and if not you go to trial.”

The SEC’s enforcement division will begin reviewing its pipeline of cases with an eye to determining when an admission of misconduct is appropriate, White said. The SEC won’t apply the new policy to cases already in settlement talks, White said.

White said she sought to review the SEC’s “no-admit, no-deny” practice after observing it as a federal prosecutor and Wall Street defense attorney. As U.S. attorney in Manhattan during the 1990s, White pioneered the use of corporate probation in a white-collar crime case against Prudential Securities Inc.

“You are trying to get as strong a deterrent message out there as you possibly can, and in some situations it can be important that admissions be part of that process,” White told reporters.

Jacob S. Frenkel, a former federal prosecutor and senior SEC enforcement attorney, said the policy will probably affect mostly smaller companies and individuals viewed as “uncontrollable fraudsters.” Big corporations that face major economic consequences from litigation “always will be afforded the opportunity to settle without admitting or denying the allegations,” Frenkel said in a phone interview.

The policy will need to be in practice before people can be sure how it will change things, Frenkel said.

“For certain defendants, it will almost be an invitation to go to trial because the most important carrot in the settlement is the ability to settle without admitting or denying the allegations,” said Frenkel, now a partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac,Maryland. “So everything is going to turn on interpreting where that red zone lies.”

To contact the reporter on this story: Dave Michaels in Washington at dmichaels5@bloomberg.net

June 19, 2013 4:51 am

SEC considers policy shift on admissions of wrongdoing

By Kara Scannell in New York

The Securities and Exchange Commission is considering a change that would require some defendants to admit wrongdoing when they have engaged in “egregious misconduct” – a move that would represent a shift away from a decades-long policy.

In a memo to enforcement attorneys, George Canellos and Andrew Ceresney, co-directors of the SEC’s enforcement division, said that “most” cases would continue to be settled with defendants not admitting or denying wrongdoing, as has been the policy since the 1970s. But in a shift, they said there were certain cases where “admissions could be in the public interest”.

“These may include misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm; where admissions might safeguard against risks posed by the defendant to the investing public, particularly when the defendant engaged in egregious intentional misconduct; or when the defendant engaged in unlawful obstruction of the commission’s investigative processes,” the directors wrote.

Any change in policy is likely to require agreement by a majority of the SEC’s five commissioners.

The commission has faced criticism from judges overseeing some settlements that it is looking for a rubber stamp for judgments that may not be just, fair or in the public interest.

The most high-profile critique was when Judge Jed Rakoff in 2011 refused to approve the SEC’s settlement with Citigroup over its sale of a collateralised mortgage product. A US appeals court is considering the issue but has signalled it may side with the SEC, citing the deference afforded to administrative agencies.

After the backlash, the SEC said it would no longer agree to no-admit, no-deny settlements when an entity or individual admitted wrongdoing in criminal cases. The memorandum to staff takes the issue further.

The SEC has argued it is more efficient to settle cases without requiring admissions of wrongdoing because of the risk of litigation and the resources required to focus on older cases rather than uncovering new frauds.

In positing the new framework, the co-directors said if there was a case that qualified for admission it would be worth litigating.

In a nod to the judicial criticisms, the SEC enforcement chiefs said: “We will also continue to strongly defend our discretion to reach such settlements in response to inquiries from courts.”

The directors said there would be a meeting with the hundreds of enforcement staffers to solicit their views. They also asked the staff to look at their inventory of cases to review whether any “warrant consideration of public acceptance of responsibility by the defendant(s)”.

June 21, 2013

S.E.C. Has a Message for Firms Not Used to Admitting Guilt

By JAMES B. STEWART

The days of cop-out settlements in big securities cases may be waning.

In a departure from long-established practice, the recently confirmed chairwoman of the Securities and Exchange Commission, Mary Jo White, said this week that defendants would no longer be allowed to settle some cases while “neither admitting nor denying” wrongdoing.

“In the interest of public accountability, you need admissions” in some cases, Ms. White told me. “Defendants are going to have to own up to their conduct on the public record,” she said. “This will help with deterrence, and it’s a matter of strengthening our hand in terms of enforcement.”

In a memo to the S.E.C. enforcement staff announcing the new policy on Monday, the agency’s co-leaders of enforcement, Andrew Ceresney and George Canellos, said there might be cases that “justify requiring the defendant’s admission of allegations in our complaint or other acknowledgment of the alleged misconduct as part of any settlement.”

They added, “Should we determine that admissions or other acknowledgment of misconduct are critical, we would require such admissions or acknowledgment, or, if the defendants refuse, litigate the case.”

Ms. White said that most cases would still be settled under the prevailing “neither admit nor deny” standard, which, she said, has been effective at encouraging defendants to settle and speeding relief to victims.

The policy change follows years of criticism that the S.E.C. has been too lenient, especially with the large institutions that were at the center of the financial crisis. Bank of America, Goldman Sachs, Citigroup and JPMorgan Chase were among the defendants that settled charges related to the financial crisis while neither admitting nor denying guilt, although Goldman was required to admit that its marketing materials were incomplete.

That this approach became such a heated public issue is in large part because of the provocative efforts of Judge Jed S. Rakoff of Federal District Court, who has twice threatened to derail settlements with large financial institutions that neither admitted nor denied the government’s allegations.

In late 2011, he ruled that he couldn’t assess the fairness of the agency’s settlement with Citigroup in a complex mortgage case without knowing what, if anything, Citigroup had actually done. In his ruling, he said that settling with defendants who neither admit nor deny the allegations is a policy “hallowed by history but not by reason.”

He described the settlement, which was for $285 million, as “pocket change” for a giant bank like Citigroup. Other judges have followed Judge Rakoff’s lead, and an appeal of his Citigroup ruling is pending before the Court of Appeals for the Second Circuit.

The new policy would seem to vindicate Judge Rakoff, at least in spirit, but Ms. White said the decision was rooted in her experience as United States attorney in New York, where defendants in criminal cases are almost always required either to enter a guilty plea or go to trial.

“Judge Rakoff and other judges put this issue more in the public eye, but it wasn’t his comments that precipitated the change,” she said. “I’ve lived with this issue for a very long time, and I decided it was something that we should review, and that could strengthen the S.E.C.’s enforcement hand.” (Judge Rakoff, who is presiding over a trial in Fresno, Calif., said he couldn’t comment, citing the appeal of his Citigroup ruling.)

Those concerned that Ms. White, who before her confirmation as chairwoman of the S.E.C. was head of the litigation department at the prominent corporate law firm Debevoise & Plimpton, might be too cozy with the big banks and corporations that were formerly her clients, can breathe easier. Even some of the S.E.C.’s harshest critics were at least somewhat mollified.

“It’s an important step in the right direction,” said John Coffee, a professor at Columbia Law School and a vocal critic of S.E.C. settlements he deems too lenient. “There’s clearly a public hunger for accountability. Mary Jo White has shown she is sensitive to this.”

Ms. White agreed. “There’s no question I share the desire for more accountability in cases where that is warranted,” she said. “I do think there are situations where public accountability is particularly important, and that will be our focus. I don’t want to overstate this — no admit, no deny will still be the way most cases are resolved — but I think it’s an important change.”

There’s little doubt that extracting admissions of wrongdoing gives the S.E.C. enormous new leverage, and not just because defendants want to avoid the damage to their reputation that comes with admitting misconduct. Any admission is likely to be seized upon by private litigants in civil lawsuits, including class actions, with potentially devastating financial consequences.

“If they admit culpability to the S.E.C., plaintiffs will cite that in their cases, and that could mean hundred of millions or billions in damages,” Professor Coffee said. “It’s not just the stigma they’re worried about.”

Those concerned that the S.E.C. already has too much power, including many corporate defense lawyers, were critical.

“I don’t like this at all,” said Brad Karp, a litigator and chairman of Paul, Weiss, Rifkind, Wharton & Garrison who represented Citigroup in its settlement talks with the S.E.C. “It gives them enormous leverage. A financial institution cannot fight a primary regulator and win. They have you. They have complete leverage over you. Even if you fight and win over a year, the damage will outweigh any litigation result.”

But Ms. White’s emphasis on public accountability suggests that she sees admissions of guilt as far more than a bargaining chip to extract bigger settlements. In the type of prominent cases cited by the enforcement staff, the S.E.C. may be unwilling to negotiate over an admission of wrongdoing and will force defendants to go to trial.

That could cut two ways. Some corporate defendants have settled cases, even when they believed they were innocent, to avoid the cloud of litigation, and treated any fines simply as a cost of doing business. Now, if the S.E.C. takes a case to trial, it will be forced to prove its case.

“If they take a hard line where admissions are an inevitable cost of resolving the case, it will force defendants to trial,” Mr. Karp said. Defendants will “try to find every way possible to avoid that outcome. If they can negotiate around it, there will be early settlements. But if not, they’ll go to trial.”

Citigroup has said that if Judge Rakoff’s ruling is upheld and its settlement is overturned, it will go to trial rather than admit wrongdoing.

Ms. White said that “our aim is to apply this policy in appropriate cases, and we’ll do this in the public interest.” She continued: “Will this lead to more cases going to trial? It’s hard to say going in, but it might. We have to be prepared to go to trial, and we have to make people believe we’re prepared.”

That may be a tall order. Defense lawyers and judges have raised questions about the S.E.C.’s trial competence in complex cases. The S.E.C. responded that of its last 11 cases that went to trial, it prevailed in eight.

An important test of that litigation capacity is likely to come next month, when Fabrice Tourre, a former Goldman Sachs trader who is accused of misleading clients in a complex mortgage deal, is scheduled to go on trial.

Exactly which cases, and how many, will result in admissions of wrongdoing remain to be seen.

“It will be very interesting to see how this plays out in six months or a year,” Mr. Karp said.

The S.E.C. memo cites three criteria: “misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm”; “egregious intentional misconduct”; or “when the defendant engaged in unlawful obstruction of the commission’s investigative processes.”

Relatively few of the financial crisis cases, including the big mortgage fraud cases settled by Citigroup, JPMorgan and Goldman Sachs, would seem to meet those criteria, because the purported misconduct wasn’t that egregious, the evidence in some cases was ambiguous and the victims were limited to a few sophisticated financial institutions rather than large numbers of the investing public.

Ms. White declined to comment on any specific cases, but said: “No one case precipitated this. From this point forward, we’ll be looking for appropriate cases in which to apply the policy. Most will still be resolved on a no admit, no deny basis. But we’ll be scrutinizing this.”

Professor Coffee said the agency should go even further, by identifying and holding more individuals responsible.

Still, he said, “You have to give Mary Jo credit: She has shown she is less tone deaf” to public demands for accountability. “The S.E.C. may have to bring fewer cases and pursue them harder,” he added. “But that could be a good thing.”