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Fewer Defendants Would Deny Guilt Under New SEC Policy

Sec

First Posted: 01/06/12 06:25 PM ET Updated: 01/07/12 09:23 AM ET

In a change of policy that comes after more than two years of public and embarrassing scoldings by a federal judge, the Securities and Exchange Commission will no longer allow some defendants to deny guilt when they settle their case.

Companies and individuals that settle a civil case with the SEC that also have admitted to or been convicted of criminal violations in a related matter will no longer be allowed to say that they "neither admit nor deny" the agency's charges, according to the agency.

The policy would end a practice that allowed such celebrated villains as Bernard Madoff -- who was sentenced to 150 years in prison for masterminding the biggest financial con job in history -- to settle charges with the SEC without admitting or denying wrongdoing. However, it wouldn't affect most SEC settlements, which come independent of any criminal charges.

Prior to the change, the SEC, which has the power to file civil, but not criminal charges, included the boilerplate disclaimer in every settlement deal reviewed by the Center for Public Integrity in an analysis last year.

"This is a logical updating of the commission's enforcement policies" said Thomas Gorman, a Washington partner at the law firm Dorsey & Whitney, who writes the SEC Actions blog. "But it doesn't signal a fundamental shift in policy that will affect the typical civil enforcement action."

That means that high-profile civil defendants will still be able to settle charges without admitting or denying any wrongdoing. Some recent examples include: Michael Dell, founder of the giant computer manufacturer, who agreed to pay $4 million to settle accounting fraud charges; Steven Rattner, the Obama administration’s one-time auto czar, who agreed to pay $6.2 million to settle pay-for-play charges involving the New York state pension fund; and Paul George Chironis, a broker-dealer at a now-defunct firm, who paid $350,000 to settle charges that he defrauded a group of elderly Sisters of Charity nuns in the Bronx.

It also probably won't do anything to lower the temperature in a public spat between New York Federal District Judge Jed Rakoff and the SEC over whether agency settlements are fair to the public.

In a 2010 ruling, the judge "reluctantly" approved a $150 million agency settlement with Bank of America over its Merrill Lynch acquisition, after having rejected an earlier, smaller deal. He said that allowing defendants to walk away without admitting guilt is a "palpable" disservice to the public interest.

"Here an agency of the United States is saying, in effect, 'Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it,'" he wrote.

More recently, Rakoff rejected a proposed $285 million settlement with Citigroup Inc. over charges that it sold risky mortgage-backed securities without telling investors that it was also betting against the debt. Once again, Rakoff said the "neither admit nor deny" language left him no way to determine whether the settlement was fair.

The SEC is now appealing Rakoff's decision in the Citigroup case.

The SEC's traditional explanation for including the boilerplate language had been that defendants will not agree to settle a case if they have to admit wrongdoing because doing so would expose them to future lawsuits from whoever might claim to have been harmed by their actions.

But this explanation didn't make much sense in instances where that same defendant was already admitting to wrongdoing in a criminal case.

For example, the SEC and the Justice Department announced on the same day last year that Wachovia had agreed to pay $148 million to settle charges that it rigged bids in the municipal securities market. The bank said it "admits, acknowledges and accepts responsibility for" manipulating the bidding process in the Justice Department deal. But it didn't admit any wrongdoing in the SEC settlement.

For its part, the SEC seems to be downplaying the significance of the change in policy and also serving notice that the change doesn't mean it is kowtowing to Rakoff.

"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," the agency said in a press release. "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."

CORRECTION: This article originally stated that more defendants would have to confess guilt under the SEC policy. In fact, more defendants would no longer be able to deny guilt.
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