Whether the Securities and Exchange Commission ("SEC")
should continue its longstanding policy of permitting enforcement
action defendants to settle by "neither admitting nor
denying" the SEC allegations is currently a matter of much
debate. The SEC's new chairman, Mary Jo White, has now voiced
her view that a shift in the SEC's policy is likely. It seems
that in the future, the SEC will require some defendants to admit
civil securities law violations. Chair White has reportedly stated
that, while most cases will still be eligible to settle on a
neither admit nor deny basis, there will be a reconsideration of
the policy as applied to cases that are especially egregious,
intentional, or result in significant investor harm. Since the SEC
already carved out from the neither admit nor deny policy those
defendants who admit certain facts as part of a guilty plea in a
criminal case, presumably the new policy will encompass enforcement
cases beyond those with parallel criminal actions. Anyone
contemplating whether to settle or litigate with the agency will
need to consider how their conduct may be viewed by the Commission
under the anticipated new policy and the potential consequences of
making admissions in SEC civil enforcement actions.
Who Will Be Required to Admit Civil
Violations?
The factors the SEC will use to determine exactly who will be
required to admit conduct and violations are currently unknown. The
considerations generally used by the SEC to evaluate the severity
of conduct in determining the type of enforcement action (federal
court civil injunctive action versus administrative proceeding),
the nature of the prospective relief sought (e.g., officer and
director bars), and the amount of monetary penalties suggest that
the likely factors will include the following:
- The dollar amount of investor losses
- The seniority of the individuals in an organization who engaged in or permitted the allegedly violative conduct
- The level of intent of the wrongdoers
- The duration of the conduct
- Whether there was any obstruction or attempted obstruction of the SEC's investigation.
The hope is that the SEC will publicly articulate the factors
that will guide its decision-making. Otherwise, putative defendants
will be left to try to discern them through interpreting precedent,
which takes years to develop.
Deciding to Settle and Admit
If the SEC adopts a policy of sometimes requiring admissions,
putative admitting defendants will need to carefully evaluate the
costs and other collateral consequences of deciding to settle and
admit. The timing of when to make an admission and settle the SEC
enforcement case will also have added significance.
The costs of admitting will likely include increased costs for
related civil settlements and increased litigation costs. It could
even lead to loss of insurance coverage, depending on the scope of
the admission. Private civil class and shareholder derivative
plaintiffs will claim significantly increased leverage based on the
issue and claim preclusion arguments that will be spawned from
admissions in SEC cases and seek higher monetary settlements. State
authorities may also assert admissions as the bases for their own
enforcement actions. Admissions may also result in the loss of
insurance coverage, since most policies do not cover expenses or
costs where there is a finding of intentional misconduct or
fraud.
In addition, admitting defendants will need to individually
consider the collateral consequences of admitting securities law
violations. Admitting securities fraud can seriously jeopardize
contracts with government entities, state licenses to engage in
financial services, surety bonds, the ability to engage in
fiduciary business, and many other things.
Defendants may also determine to litigate with the SEC, at least
for some time before admitting, to achieve other strategic and
tactical advantages. For example, why not spend the money to
litigate with the SEC, at least through a motion to dismiss or
summary judgment, in hopes of narrowing the SEC's requested
admissions? Perhaps the time it takes to litigate those phases of
an SEC action provide time for similar motions to be decided in
related private litigation.
For these and likely additional reasons, more SEC defendants may
choose to litigate rather than admit. The more who do so, the less
reputational stigma will be attached to litigating with the
government. While defendants may not choose to, or want to,
litigate to final judgment with the SEC, there will be complex
timing decisions about when to resolve the SEC action with an
admission. The advisable course could well be that litigating with
the SEC for at least some period of time may be advantageous in
reaching a global resolution of the SEC enforcement case, any
related state regulatory actions, and private civil
litigation.
In the end, defendants that will have to admit securities
violations in an SEC case will have to evaluate all these
considerations and determine whether it will be worse for their
reputations to litigate with the government than to admit outright
to wrongdoing. Further, when settling an admission case with the
SEC, the hard-fought battleground will become negotiating the
specific charges that will be brought, the description of the
underlying conduct, the monetary settlement, and the other
remedies. No doubt, there will be some cases where sound reasons
will favor negotiating these issues and settling rather than
litigating over admitting. But all of this will be determined only
after a detailed consideration of the specifics with the assistance
of experienced counsel.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.