SEC settlement-language change is (at best) mere cosmetics
Late Friday the Securities and Exchange Commission confirmed in a statement what the New York Times first reported Friday morning: it has changed its policy on the boilerplate “neither admit nor deny” language in most SEC settlement agreements. But don’t get too excited. The change will affect only cases in which the defendant has admitted guilt or been convicted in a related criminal action. In settlements with those criminal defendants, the SEC will delete “inconsistent” concessions and instead “recite the fact and nature of the criminal conviction or criminal [admission] in the settlement documents.”
In other words, defendants whose guilt has already been established under the higher standard of criminal law can no longer evade responsibility for civil charges. Which leads, of course, to the question of why it took the SEC 40 years to change such a ridiculous policy.
In the weeks since U.S. Senior District Judge Jed Rakoff of Manhattan federal court rejected the agency’s proposed $285 million settlement with Citigroup for misleading investors about a synthetic CDO, the SEC has argued long and loud that the boilerplate Rakoff scorned is intrinsic to its ability to reach settlements with defendants worried about liability in follow-on civil suits by private plaintiffs lawyers. I get that. And as I’ve reported, just about every other federal agency with enforcement power has a similar practice of permitting defendants to settle without conceding they’ve done anything wrong. I have my doubts that deleting pro forma “neither admit nor deny” language from settlement agreements would result in a dramatic change in the value of follow-on private settlements, but perhaps I, like most federal judges, have become inured to boilerplate.
Still, let’s think for a minute about just how absurd it is to include “neither admit nor deny” language in settlements with admitted or convicted criminals. My Reuters colleague Grant McCool points out, for instance, that when BernieMadoff settled with the SEC in June 2009, he wasn’t required to admit wrongdoing, even though he’d already pled guilty to running the biggest Ponzi scheme in history. Crazy, right? And I haven’t noticed anyone citing Madoff’s SEC settlement to suggest that maybe he isn’t civilly liable for defrauding investors.
Seriously: Does any corporate defendant facing civil exposure from a criminal admission or conviction really believe the SEC boilerplate confers any protection from private suits? That’s like saying you’re not naked if you’re wearing Saran Wrap for underwear.
The irony is that the SEC gains as little as defendants lose in the policy change. The agency went out of its way to assert that the revision wasn’t prompted by Rakoff’s crusade. Its statement said the policy change came after “a review by senior enforcement staff that began this spring and separate discussions with the Commissioners over the last several months,” and that it is “separate and unrelated to recent rulings in the Citigroup case.” (And, in fact, the revised policy wouldn’t have changed the boilerplate in the Citi agreement, since that case doesn’t involve a parallel criminal admission or conviction.) I suppose the SEC could argue that at least it can no longer be ridiculed for settlements like the one it reached with Madoff.
But any scrutiny of its “neither admit nor deny” boilerplate can’t be good for the SEC as it challenges Rakoff’s ruling in the Citi case. If no one takes the language seriously, why include it?
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