For years, the Securities and Exchange Commission has settled cases using a standard disclaimer stating that the defendant neither admits nor denies wrongdoing. This standard disclaimer allowed the SEC to claim victory and the defendant to avoid the type of public admission of wrongdoing that could be used against the defendant by shareholders or other injured parties in subsequent private lawsuits seeking damages. Thus, under this policy, the defendant could admit certain criminal conduct when criminally prosecuted by the Department of Justice or could be criminally convicted of that conduct, but the defendant could simultaneously settle civil charges with the SEC without admitting or denying nearly identical allegations in the SEC’s complaint.
Late last year, federal judge Jed Rakoff, sitting in the Southern District of New York, refused to approve a nearly $300 million settlement in an SEC action brought against Citigroup because the bank -- which had not been charged criminally -- had not been obliged under the terms of the settlement to acknowledge any wrongdoing. Chastened, the SEC on January 9th announced that it would be modifying the long-standing policy criticized by Judge Rakoff. The SEC will no longer allow defendants to settle cases involving civil fraud or insider trading charges without the defendant admitting or denying wrongdoing in circumstances where the defendant has admitted such conduct in its resolution with the DOJ or another government agency. Now, any civil settlement that the defendant enters into with the SEC will cite the admission of conduct or the conviction in the corresponding criminal case.
However, the SEC will continue to use the “neither admits nor denies” language in the large majority of SEC settlements, since most settlements are accomplished with defendants who have neither been prosecuted nor admitted wrongdoing to another government agency. Since Citigroup was not criminally prosecuted, the new policy would have left intact the formulation of that much-criticized settlement. It remains to be seen, therefore, whether the policy change implemented by the SEC will stem the judicial criticism so pointedly directed to the agency.
(Jana Volante, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Pittsburgh, PA office. Her practice concerns white collar criminal defense and commercial litigation)