In October 2013, we issued a First Alert exploring the June 2013 announcement by Mary Jo White, chairwoman of the Securities and Exchange Commission (SEC), about a significant change to the SEC’s longstanding practice of allowing defendants to settle SEC enforcement actions while “neither admitting or denying” wrongdoing. Specifically, Chairwoman White stated that the SEC now will require defendants to admit wrongdoing when settling proceedings involving serious wrongdoing. Shortly thereafter, the SEC acted on its new policy in the high-profile Harbinger Capital Partners and J.P. Morgan “London Whale” cases. And just last week, on March 13, 2014, Lions Gate Entertainment Corp. agreed to pay $7.5 million and admit wrongdoing to settle the SEC’s charges that Lions Gate failed to fully and accurately disclose to investors a key aspect of its effort to thwart a hostile takeover bid.
Since our earlier First Alert, the SEC has clarified that its new policy is for egregious cases of public significance.
In a December 17, 2013, press release, the SEC said that it “now requires admissions of misconduct in a discrete category of cases where heightened accountability and acceptance of responsibility by a defendant are appropriate and in the public interest.”
Chairwoman White followed that release with January 27, 2014, remarks to the 41st Annual Securities Regulation Institute held in Coronado, California:
For many years, the SEC . . . typically did not require entities or individuals to admit wrongdoing in order to enter into a settlement. This no admit/no deny settlement protocol makes a great deal of sense and has served the public interest very well. More and quicker settlements generally mean that investors receive as much (and sometimes more) compensation than they would after a successful trial – and without the litigation risk or the inevitable delay that comes with every trial. Settlements also can achieve more certain and swifter civil penalties, and bars of wrongdoers from the industry or from serving as officers or directors of public companies – all very important remedies for deterrence and the public interest.
So, why modify the no admit/no deny protocol at all? . . . Because admissions can achieve a greater measure of public accountability, which can be important to the public’s confidence in the strength and credibility of law enforcement and the safety of our markets.
[W]e have said we will consider admissions in cases involving egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the wrongdoer poses a particular future threat to investors or the markets, or where the defendant engaged in unlawful obstruction of the Commission’s processes.
As we go forward in 2014, you will see more cases involving admissions.
Notably, Chairwoman White has routinely stopped short of saying that her list of case types warranting admissions is exhaustive. To the contrary, she has said, “When and how we decide to require admissions will continue to evolve and be subject to further articulation in the cases we bring and as we discuss it publicly.”
Nevertheless, according to a March 13, 2014, article by Brian Mahoney for Law360 titled “Admissions of Guilt Won’t Become Norm, SEC Official Says,” Andrew Ceresney, the SEC’s co-director of the SEC’s enforcement division, gave public companies some level of comfort that requiring wrongdoing admissions will be the exception rather than the rule. Specifically, Law360 quoted Mr. Ceresney as saying during a March 13, 2014, “Enforcers’ Roundtable” panel at a corporate counsel conference at Georgetown University Law Center that “[i]n many cases, frankly, in most cases, the other interests – conserving resources, moving quickly and avoiding litigation risk – are frankly more important than the additional accountability that comes from admissions.”
Notwithstanding the SEC’s clarifying remarks, it remains prudent for public companies to maintain high-quality D&O insurance policies and to involve insurance coverage counsel when negotiating SEC settlements.
In our prior FirstAlert on this topic, we recommended that public companies take a fresh look at their D&O policies in light of the SEC’s new policy, to confirm that the policies provide “state of the art” protection that will respond in the event that they find themselves on the admitting end of the SEC’s new policy. We stressed the following areas: (1) severability; (2) non-rescindability; (3) the fraud exclusion; (4) the willful violation of law exclusion; (5) the illegal profit exclusion; and (6) individual directors’ and officers’ Side A primary and excess coverage. An in-depth analysis of these D&O issues can be found in our related December 2013 article published in Westlaw Journal Directors and Officers Liability.
We also advised that if the SEC brings an enforcement action, defense counsel should work closely with insurance coverage counsel in negotiating the language used in any admissions of wrongdoing included in a settlement to avoid inadvertently limiting or negating coverage.
In our view, these recommendations remain prudent despite the SEC’s clarification that its policy requiring admissions of wrongdoing will not be for garden-variety cases, but for egregiousness. Although no public company expects to be involved in the kinds of wrongdoing described by Chairwoman White, it only takes one sophisticated bad-apple officer or employee for a public company to learn the hard way about what many D&O policies do not cover when wrongdoing is admitted.