Earlier this week, US Securities and Exchange Commission Chairman Mary Jo White informed the SEC’s Enforcement Division staff that the SEC will begin requiring defendants to admit guilt in order to settle some civil lawsuits. This policy change follows harsh criticism of the SEC by certain federal judges for allowing financial institutions to settle massive securities litigation without admitting or denying any wrongdoing.
In its letter to its enforcement team, the SEC said that it was changing its no-admit, no-deny policy for select cases involving misconduct that harmed large numbers of investors. The letter reportedly said: “While the no admit/deny language is a powerful tool, there may be situations where we determine that a different approach is appropriate.” “There may be certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution,” the letter continued.
The SEC often settles its cases without a defendant’s admission of guilt. Typically, however, the SEC’s settlements also prohibit a defendant from denying the allegations. Although the policy change may lead to more high-profile, precedent-setting securities trials, it likely will adversely impact the frequency and speed with which the SEC settles certain cases. The majority of SEC matters are resolved through settlement. Large institutional defendants are going to be very reluctant to admit wrongdoing when facing potential criminal liability or potential additional civil liability, such as customer class-action claims.
Many commentators already have suggested that this policy change was not unexpected given Chairman White’s background as a criminal prosecutor. Accordingly, this is tantamount to the new sheriff drawing a line in the sand.
Assuming that the SEC does, in fact, follow this new policy, it will be interesting to see the impact of the change. The SEC, it seems, will have considerably greater difficulty bringing civil proceedings to resolution without going to trial, which, in turn, also could make it more difficult to prosecute parallel criminal actions. At the same time, it is theoretically possible that the policy change will increase the frequency of admissions of guilt, which may, in turn, deter other similar wrongdoing.
More than likely, however, is that it will be difficult to identify when and where this policy change is being applied to specific cases. Will the SEC really have the discipline to reject a massive civil settlement, avoiding the expense and uncertainty of a trial, simply to obtain an admission of guilt by a corporate entity? That likely will depend on just how tough the new sheriff really is.