News & Articles

As reported today by the WSJ and Forbes.com, the S.E.C. announced a change in its settlement policy. Under its previous policy, a defendant could be found guilty of criminal conduct but still settle parallel SEC charges related to the same conduct without admitting or denying civil liability. Under the policy announced today, SEC Enforcement Division Director Robert Khuzami announced that the S.E.C. had reached the conclusion that it was “unnecessary for there to be a ‘neither admit’ provision in those cases where a defendant had been criminally convicted of conduct that formed the basis of a parallel civil enforcement proceeding.”

This seems right and unremarkable, except for the fact that it took so long for the S.E.C. to reach this uncontroversial conclusion.

What is remarkable is how limited this change is.  It only applies to cases, “involving parallel (i) criminal convictions or (ii) NPAs or DPAs that include admissions or acknowledgments of criminal conduct.” It does not affect the settlement of civil actions where the Justice Department has not also pursued criminal charges. In those cases, the S.E.C. is sticking to its approach of accepting settlements where defendants “neither admit nor deny” even while agreeing to pay large fines or make significant operational changes.

Khuzami stated that the new policy was not a result of, or reaction to, Judge Rakoff’s recent decision slamming the “S.E.C.’s long-standing policy – hallowed by history, but not by reason – of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations.” The new policy does not address the problem noted by Judge Rakoff where the defendant of a S.E.C. enforcement action has not also been charged by the Justice Department with criminal wrongdoing in a parallel proceeding.

Instead, the limited nature of the new policy means that the only time that defendants will be required to admit civil liability to settle with the S.E.C. is when they have already admitted criminal liability (which carries much greater penalties).  But if the Justice Department does not also pursue criminal charges, the defendants will still be able to settle with the S.E.C. without admitting or denying liability.  As I’ve noted before, if the S.E.C. did require defendants to admit to liability as part of a settlement, there may be fewer settlements but increased enforcement.