There was a time when the SEC settled a case, filed the papers with the court and the action was resolved. That still happens in most of its cases. But to paraphrase a well know poet and song writer “the times they maybe a-changin.” (Apologies to Bob Dylan).

In recent months the Commission has had difficulty obtaining court approval of settlements in cases such as Bank of America and Citigroup (both discussed here). To be sure the agency eventually secured the necessary approval but not without some difficulty and criticism. The same is true of the recent settlements in SEC v. Vitesse Semiconductor Corporation, Civil Action No, 10 Civ. 9239 (S.D.N.Y. Filed Dec. 10, 2010)(here). The resolutions here may however say much more about the future of settling with the Commission.

Vitesse Semiconductor is a financial fraud action which named as defendants the company and four of its former officers. The complaint details two overlapping schemes which inflated revenue. One continued over a period of five years beginning in 2001. Revenue was recognized on the shipment of product to distributors where there were side agreements and no provision was made for returns. The second began at the same time as the first but only lasted until 2004. It involved the backdating of stock options. Parallel criminal charges were filed.

The company and two of the four individual defendants settled at the time the SEC filed the action. The two individual settling defendants had pleaded guilty in the parallel criminal case. Since the filing of the complaint the court has had the settlements under advisement. Yesterday Judge Rakoff entered those settlements.

The Court’s order raised significant questions regarding the settlements and calls into question the SEC’s long standing practice of resolving cases “without admitting or denying” the allegations in the complaint. The Court began by noting that the proposed settlements for the company and the two officers were filed by the SEC “confident that the courts . . . were no more than rubber stamps . . . [and] without so much as a word of explanation as to why the Court should approve these consent Judgments or how the Consent Judgments met the legal standards the Court is required to apply . . . “

The court requested an explanation. Letter briefs were filed. A hearing was held and “some of the Court’s stated concerns” were addressed. In reviewing the terms of the settlements the Court concluded they were acceptable when viewed as part of the overall resolution of the related criminal and civil damage actions. The Court expressed deep concern however about approving consent decrees based on the Commission’s traditional “neither admit nor deny” policy where, as here, there are serious allegations of fraud and criminal charges.

The Commission’s practice in this regard is not new the Court noted. Nor did it begin in 1972 as the SEC stated in a letter brief. It began “[l]ong before 1972,” according to the Court. It traces to a desire by defendants to enter into settlements while avoiding the collateral effects of parallel civil litigation and SEC’s effort to facilitate settlements. The practice evolved at a time when the SEC’s remedies were largely limited to injunctive relief which focused on using the Court’s contempt power to curb future misconduct. By 1972 the Commission realized that as soon as the settlement was concluded the defendant would announce that it only settled to avoid protracted litigation. Accordingly, in that year the Commission began inserting a provision in its settlements which precludes a defendant from publicly denying the allegations in the complaint.

The result of this history is, according to Judge Rakoff, “a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C. The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C. but, by gosh, he had better be careful not to deny them either . . . Only one thing is left certain: the public will never know whether the S.E.C.’s charges are true . . .” This the Court concluded is a “disservice” to the public interest. The irony of this case is that the two individual defendants have admitted the charges in the criminal case. The company has also essentially admitted the allegations by paying the settlement in the parallel damage action and agreeing to pay a large fine in this case all of which leaves it with little cash.

Ultimately the Court decided to let the “money do the talking” and approved the settlements. In doing so however the Court served notice that the issue may well be revisited since it is “reserving for the future the substantial questions of whether the Court can approve other settlements that involve the practice of ‘neither admitting nor denying’ . . . “ In reaching this conclusion Judge Rakoff cited a February 4, 2011 speech at SEC Speaks by Commissioner Luis Aguilar (stating that if the practice of “revisionist . . . press releases” issued by settling defendants is not eliminated “it may be worth revisiting the Commission’s practice of routinely accepting settlements . . .’without admitting or denying’. . . “).