Securities and Exchange Commission to begin demanding admissions of guilt in some settlements

by Brian Wolfman

This June 21 article by James Stewart explains that

In a departure from long-established practice, the recently confirmed
chairwoman of the Securities and Exchange Commission, Mary Jo White,
said this week that defendants would no longer be allowed to settle some
cases while “neither admitting nor denying” wrongdoing. “In the interest of public accountability, you need admissions” in some
cases, Ms. White told me. “Defendants are going to have to own up to
their conduct on the public record,” she said. “This will help with
deterrence, and it’s a matter of strengthening our hand in terms of
enforcement.” * * * That this approach became such a heated public issue is in large part
because of the provocative efforts of Judge Jed S. Rakoff of Federal
District Court, who has twice threatened to derail settlements with
large financial institutions that neither admitted nor denied the
government’s allegations. In late 2011, he ruled that he couldn’t assess the fairness of the
agency’s settlement with Citigroup in a complex mortgage case without
knowing what, if anything, Citigroup had actually done. In his ruling,
he said that settling with defendants who neither admit nor deny the
allegations is a policy “hallowed by history but not by reason.” He described the settlement, which was for $285 million, as “pocket
change” for a giant bank like Citigroup. Other judges have followed
Judge Rakoff’s lead, and an appeal of his Citigroup ruling is pending
before the Court of Appeals for the Second Circuit.

It will be interesting to see how often the SEC is able to obtain settlements that include admissions of the truth of the agency's allegations. It will also be interesting to see how often SEC settlements include admissions of legal wrongdoing as well as admissions of the agency's factual allegations. Bear in mind that a key reason that targets of federal enforcement don't want to admit
liability is so that the settlement of government charges cannot be used
against them in private civil litigation.

The SEC is not the only government agency that routinely enters into neither-admit-nor-deny settlements. The Federal Trade Commission does so as well. In this October 2012 interview in "The Antitrust Source," FTC Commissioner Maureen Ohlhausen explained why she favors continued use of these settlements:

ANTITRUST SOURCE: Many federal agencies permit respondents to deny liability or to “neither
admit nor deny” liability in settlement agreements. Recently, some judges have pushed back
against that practice. Do you have a view on the appropriateness of permitting a respondent to
expressly deny liability when entering into an FTC consent agreement?

OHLHAUSEN: I do. At the FTC, our role is to stop harm that’s occurring in the market and to get the best result for consumers. We are not an agency that has authority to punish parties. With that goal in mind, I think whatever preserves the most flexibility for staff to be able to stop the conduct as soon as possible and get the best redress for consumers should be our priority. Requiring defendants to admit liability would be a problem, as most well-counseled defendants would not settle on those terms and it’s not fair to impose this only on the less well-counseled defendants, who may not be any more guilty than the well-counseled. If we were to go to a standard under which parties had to admit liability, that would make it extremely difficult to reach settlements, which often are very efficient options to stop the bad conduct and get redress for consumers…. I believe this issue [raised by the courts] is merely a skirmish that should not impel us to expend resources to change our practice, which is currently consistent with that of DOJ and other agencies. Our proper focus is on stopping bad practices and obtaining redress for consumers, which is best achieved by preserving some bargaining leverage for staff on the wording in settlements.

The Consumer Financial Protection Bureau has recently begun exercising its enforcement powers. We posted last week about two CFPB consent orders (go here and here) against U.S. Bank and one of its non-bank partners aimed at stopping misleading lending practices that target U.S. service members. Those consent orders contain this language: "By this Stipulation, Respondent has consented to the issuance of this Consent Order … by the Bureau under [relevant law], without admitting or denying any of the findings of fact or conclusions of law, except that Respondent admits the Bureau’s jurisdiction over Respondent and the subject matter of this action."

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