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.