SEC Announces Changes to its Settlement Policy

by Mike Mintz on January 19, 2012 · 1 comment

in martindale.com,Securities Law

The Securities and Exchange Commission (“SEC”) recently announced a change in its settlement policy. It will now demand that defendants admit wrongdoing if they have already made such an admission in a separate criminal proceeding. The SEC has finally rescinded the policy allowing defendants to use the non-committal “neither admit nor deny” language in settlements if there is a parallel criminal conviction and the defendant has already admitted violating the law. Clearly, if a defendant has already admitted criminal wrong-doing admitting wrongdoing in the civil case is inconsequential.

The policy change comes on the heels of a decision by U.S. Southern District of New York Judge Jed Rakoff in U.S. Securities and Exchange Commission v. Citigroup Global Markets, Inc., 11 Civ. 7387 where Judge Rakoff rejected a $285 settlement between the SEC and Citigroup.  In that opinion, he lambasted the SEC’s practice of allowing defendants to use the “neither admit nor deny” statement, noting that the public has an overriding interest to know the truth.  An appeals court subsequently put the proceedings on hold.  While SEC Enforcement Division Director Robert Khuzami denied that there was any link between Judge Rakoff’s decision and the recent change in the SEC’s policy, the timing does seem dubious.

Here is SEC Enforcement Division Director Robert Khuzami’s full statement on the new policy:

Following a review by senior enforcement staff that began this spring and separate discussions with the Commissioners over the last several months, last week we modified our settlement language for cases involving criminal convictions where a defendant has admitted violations of the criminal law. As explained below, the new policy does not require admissions or adjudications of fact beyond those already made in criminal cases, but eliminates language that may be construed as inconsistent with admissions or findings that have already been made in the criminal cases.

Under our traditional “neither admit nor deny” approach, a defendant could be found guilty of criminal conduct and, at the same time, settle parallel SEC charges while neither admitting nor denying civil liability. This approach has reflected that the goals, objectives and other factors in the civil settlements that we and other federal and state agencies enter into often are distinguishable from those at issue in criminal proceedings. It nevertheless seemed unnecessary for there to be a “neither admit” provision in those cases where a defendant had been criminally convicted of conduct that formed the basis of a parallel civil enforcement proceeding.

The change applies to cases involving parallel (i) criminal convictions or (ii) NPAs or DPAs that include admissions or acknowledgments of criminal conduct. Under the new approach, for those settlements we will:

  • Delete the “neither admit nor deny” language from the settlement documents.
  • Recite the fact and nature of the criminal conviction or criminal NPA/DPA in the settlement documents.
  • Give the staff discretion to incorporate into the settlement documents any relevant facts admitted during the plea allocution or set out in a jury verdict form or in the criminal NPA/DPA.
  • Retain the current prohibition on denying the allegations of the Complaint/OIP or making statements suggesting the Commission’s allegations are without factual basis.

‪The revision applies in the minority of our cases where there is a parallel criminal conviction (by plea or verdict) or criminal NPA/DPA involving factual or legal claims that overlap to some degree with the factual or legal claims set out in the Commission’s complaint or OIP.

This policy change does not affect our traditional “neither admit nor deny” approach in settlements that do not involve criminal convictions or admissions of criminal law violations. In particular, it is separate from and unrelated to the recent ruling in the Citigroup case, which does not involve a criminal conviction or admissions of criminal law violations. We have appealed that ruling and the reasons for that appeal are described in the public statement I issued at that time.

The policy change does not affect most of the SEC’s cases which are civil in nature, and it remains to be seen whether this policy change will have any meaningful effect on the settlement statements of financial heavyweights who will be accused of wrongdoing in the future.

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