by Bruce Carton
In his remarks at the “SEC Speaks in 2011” program in February, SEC Commissioner Luis Aguilar threw fuel on some long-smoldering embers at the agency: its policy of permitting defendants to settle cases without admitting or denying any misconduct.
Aguilar stated his goal that SEC settlements should “have obvious deterrence value” and cause those tempted to engage in similar misconduct to think twice. He also said he wanted settling defendants to accept accountability for their violations and even “issue mea culpas” to the public. That may be unrealistic, given the potential liability that could result from private civil actions against the same defendants. But Aguilar expressed his hope that at a minimum, 2011 will bring:
“An end to the press release issued by a defendant after a settlement explaining how the conduct was really not that bad or that the regulator over-reacted. I hope that this revisionist history in press releases will be a relic of the past. If not, it may be worth revisiting the Commission’s practice of routinely accepting settlements from defendants who agree to sanctions ‘without admitting or denying’ the misconduct.”
The settlement practice Aguilar cited is a policy concerning Consent Orders implemented by the SEC in 1972. The policy states that the agency will not “permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings.” The policy further states that in the SEC’s view, “a refusal to admit the allegations is equivalent to a denial unless the defendant or respondent states that he neither admits nor denies the allegations” (emphasis added). Prior to adopting this policy, SEC practice had been to allow a defendant to settle without admitting to allegations, which opened the door for defendants to later publicly deny the allegations.
Aguilar didn’t call out any specific post-settlement press releases or statements by defendants, but he may well have had in mind two cases settled the month before. In January, the SEC charged Charles Schwab Investment Management and Charles Schwab & Co. with making misleading statements and omissions regarding the Schwab YieldPlus Fund. Without admitting or denying the allegations in the SEC’s complaint, the Schwab entities settled the SEC charges for more than $118 million.
That same day, however, Schwab issued a press release of its own stating that while it had settled the case, “Schwab would never seek to profit at the expense of its clients.” In an apparent jab at the SEC, Schwab also expressed its hope that in the future, “greater focus and attention will ultimately be given to the investment banks that created mortgage-backed securities and the ratings agencies that legitimized them with triple-A ratings, which have so far largely escaped scrutiny and accountability.”
Just 10 days later Richard White, a former vice president with World Fuel Services Corp., settled an SEC insider-trading case against him. White reportedly agreed to a settlement—without admitting or denying the allegations in the SEC’s complaint—that required him to pay $11,742 in disgorged profits and civil penalties.
But in an article about the case published later that same day, White’s attorney made several bold statements about the matter. He was quoted as saying that the SEC had no evidence to support the connection between White and the person he allegedly tipped off, and that the case was “an example of the great care the SEC takes to squash ants. They understood that they had no basis to sue this man for tipping, yet they insisted on going forward with this insipid claim.” Sounds like a denial to me.
If the SEC believes a defendant has violated the “without denying” provision of a settlement, it has the discretion to file a motion in court to vacate the settlement; indeed, that’s happened before. In 1996, the SEC filed a settled insider-trading action against Michael Angelos, in which Angelos agreed to settle the case without admitting or denying the allegations against him. Shortly thereafter, counsel for Angelos made statements that the SEC construed as a denial of the allegations in his complaint, violating his agreement to settle the action without admitting or denying these allegations. Just one week after the settlement, the SEC filed a motion to vacate the judgment entered against Angelos. The move forced him to retract the comments made by his attorneys with this public statement:
“I settled this case without admitting or denying the allegations of the complaint. To comply with my settlement with the Securities and Exchange Commission, I withdraw any statement made on my behalf that may have been inconsistent therewith. I am pleased that this settlement resolves the SEC’s lawsuit against me. I will have no further comment other than any sworn testimony I may give in this or any other matter.”
Any move to end the decades-old practice of accepting settlements from defendants who do so “without admitting or denying” the misconduct would be A Big Deal—and would come with a significant downside for the SEC as well. On one hand, doing so would likely eliminate the post-settlement “revisionism” by defendants that prompted Aguilar’s remarks. It would hardly be persuasive for a defendant to settle a case, expressly admit to the allegations, then state hours later that the SEC’s case was baseless.
In addition, requiring settling defendants to admit to the alleged misconduct would address one of the concerns increasingly raised by federal judges, who must give final approval to these settlements. In September 2009, for example, Judge Jed Rakoff took the unusual step of rejecting the SEC’s settlement with Bank of America in a case where the SEC alleged that BofA “materially lied to its shareholders” in a proxy statement. In pre-trial litigation of the matter, BofA denied that investors were misled and submitted “voluminous papers protesting its innocence.” But if the bank were innocent of lying to its shareholders, Rakoff asked, “Why is it prepared to pay $33 million of its shareholders’ money as a penalty for lying to them?”
Despite standard language in the settlement stating that the bank did not deny (or admit) the SEC’s allegations, Rakoff found that the lack of any particularized facts and BofA’s contention that it never made any false or misleading statements left the court without a “factual predicate for imposing such relief.” He called the proposed settlement no more than “a contrivance designed to provide the SEC with the facade of enforcement … [where] the SEC gets to claim that it is exposing wrongdoing on the part of Bank of America in a high-profile merger; the bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.”
Rakoff ultimately approved a revised consent order that provided “a much better developed statement of the underlying facts and inferences drawn therefrom,” but described it as “half-baked justice at best.”
Whatever benefits might be gained from toughening the SEC’s policy, the agency’s ability to settle cases clearly would suffer a big hit if defendants were required to admit their alleged wrongdoing. As SEC Chairman Mary Schapiro acknowledged following the BofA case, “If we take away this tool [of ‘neither admit nor deny’], companies would have little reason to settle, and many more cases would end up in litigation.”
Defendants who admit wrongdoing in SEC settlements open themselves up to potentially huge civil liability; the 1979 Supreme Court decision in Parklane Hosiery v. Shore provides that under the doctrine of offensive collateral estoppel, someone who has a “full and fair” opportunity to litigate their claims in an SEC action can’t later re-litigate the question of whether he violated the securities laws in a private securities lawsuit.
With the SEC already struggling to handle its current responsibilities under a stagnant budget, now would be a poor time to consider a policy change that would greatly reduce settlements and increase litigated cases. A better idea: let the SEC make it clear, as it did in the Angelos case, that post-settlement statements that deny wrongdoing violate the “without denying” term of the settlement agreement, and won’t be tolerated.
Originally published in Compliance Week. Reprinted with permission.
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