SEC's Policy Shift on No-Admit, No-Deny Settlements Could Impact You
SEC’s Policy Shift on No-Admit, No-Deny Settlements
Could Impact You
By Toby Galloway and Colleen Deal
Special Contributors to the Texas Lawbook
July 17, 2013 –Newly minted Securities and Exchange Commission Chair Mary Jo White has announced a policy shift
in SEC settlements that could increase accountability of certain securities fraud defendants, but also could (1) have
negative collateral consequences for defendants in private securities cases; (2) lead to decreased cooperation with the
SEC and fewer settlements of SEC enforcement actions, resulting in greater litigation costs for defendants and the
SEC; (3) prolong the time it takes to return funds to aggrieved investors; and (4) lead to fewer enforcement actions
Every in-house attorney should take notice.
Historically, the SEC and a defendant would reach a settlement without requiring the defendant to admit the
allegations. U.S. district court judges would evaluate the proposed consent orders, exercise their independent
judgment, and routinely sign off on the SEC’s deals.
Now, however, in apparent response to criticism from various quarters, including certain federal district judges and
politicians such as Senator Elizabeth Warren of Massachusetts, the SEC has declared that it will require admission of
wrongdoing in certain cases. Chair White and co-enforcement directors Andrew Ceresney and George Canellos have
signaled their approval of this revised policy. And on Thursday, June 27, the two newest presidential nominees to the
Commission – Democrat Kara Stein and Republican Michael Piwowar – also endorsed this approach during their
Senate confirmation hearings.
Other federal agencies, including the Commodity Futures Trading Commission, Federal Trade Commission, and the
Federal Deposit Insurance Corporation, have long obtained consent decrees from defendants without requiring any
admission of wrongdoing. The U.S. Department of Justice’s civil division is even more lenient, permitting defendants
to expressly and repeatedly deny allegations in some settlements. The SEC’s longstanding neither-admit-nor-deny
policy has always precluded defendants from denying wrongdoing; they just didn’t have to admit the allegations.
But in the wake of the American financial crisis of 2007-2009, the SEC’s longstanding neither-admit-nor-deny policy
came under great scrutiny. In November 2011, a U.S. district judge in New York wrote a groundbreaking opinion in
which he refused to approve a high-profile neither-admit-nor-deny settlement.
SEC v. Citigroup Global Markets, Inc.: Setting the Stage for Policy Change
In SEC v. Citigroup Global Markets, Inc., Judge Jed S. Rakoff famously condemned the SEC’s neither-admit-nor-deny
policy and rejected a $285 million settlement between Citigroup and the SEC. According to the SEC’s complaint,
Citigroup structured a billion-dollar fund that allowed it to dump some questionable assets on misinformed investors.
Citigroup’s alleged fraud was in falsely telling investors that an independent adviser was choosing the portfolio’s
investments. Citigroup ultimately made about $160 million from the deal, while investors lost more than $700
million. In keeping with its traditional practice, the SEC presented a consent judgment, together with Citigroup’s
consent to its entry “[w]ithout admitting or denying the allegations of the complaint,” to the court for its signature.
After reviewing the consent judgment, Judge Rakoff took issue with the SEC’s proposed settlement with Citigroup, a
recidivist by the SEC’s own account, for mere “pocket change to any entity as large as Citigroup.” In concluding that
the proposed consent judgment was “neither fair, nor reasonable, nor adequate, nor in the public interest,” Judge
Rakoff stated that the SEC’s neither-admit-nor-deny policy—“hallowed by history, but not by reason”—deprived the
public from knowing the truth in matters of public importance.
The SEC and Citigroup promptly appealed the order rejecting their settlement. That appeal remains pending before
the Second Circuit Court of Appeals and is ripe for determination. Will the SEC’s shift in policy undermine its
arguments on appeal? Time will tell.
Other Judges Following Suit—And the SEC?
Despite the ongoing appeal in SEC v. Citigroup Global Markets, Inc., a handful of judges have followed Judge Rakoff’s
lead and refused to sign off on other SEC settlement deals. For example, Judge John Kane in Denver recently rejected
a $13 million settlement stemming from Ponzi-scheme allegations, writing “I refuse to approve penalties against a
defendant who remains defiantly mute as to the veracity of the allegations against him.”
Although the floodgates have yet to fully open, the SEC has taken notice of this new judicial skepticism. In January
2012, the SEC made headlines when it announced that it would no longer allow companies that admit criminal
wrongdoing in securities fraud cases to take advantage of its neither-admit-nor-deny civil settlement practice. The
SEC claimed that the policy change was “separate from and unrelated to” Judge Rakoff’s rejection of its proposed
settlement with Citigroup. But the SEC’s announcement appeared to many observers as an attempt to address the
On June 18, 2013, the SEC took the policy shift a step further. In her first significant enforcement policy move since
the Senate unanimously approved her to lead the SEC in April, Chair Mary Jo White announced that the SEC will seek
admissions of wrongdoing from defendants in select enforcement cases, particularly those involving “widespread
harm to investors” or “egregious intentional misconduct.” Although clarifying that most cases will still be settled using
the old “no admit, no deny” language, Chair White commented that the determination of whether to demand an
admission “will be case by case to some degree.”
When and how the SEC will implement its new policy is not clear. The SEC is not ready to do away with its traditional
policy wholesale, but is certainly willing to chip away at it. The SEC seems to want to send the message that it is
prepared to reprimand the most flagrant offenders with something more than a slap on the wrist in the form of a
multi-million-dollar civil penalty. Of course, determining just which cases are so egregious as to require admission of
civil wrongdoing, but not sufficiently egregious to warrant criminal prosecution, will be tricky.
With Change Comes Consequences, Both Good and Bad
Beyond buying some goodwill for the SEC, the policy shift aims to address accountability and deterrence. Although
the neither-admit-nor-deny settlement practice has facilitated more settlements, critics, like Judge Rakoff, have
complained that it does nothing to deter repeat offenders or to shed light on the truth of the SEC’s allegations. On its
face, the tougher enforcement policy has some appeal. But there are inevitable costs that come with the change.
For one, allowing defendants to neither admit nor deny their wrongdoing encouraged cooperation with the SEC. Now,
in those cases where admissions are sought, defendants may be unwilling to settle, leaving it to the SEC to pursue
them in court. Because the private plaintiffs’ bar would almost certainly seek to use the admission in private securities
litigation, defendants would be reluctant, to say the very least, to make such admissions.
But the policy could have unintended consequences for the SEC, too. By tying up its already limited resources in
litigation, it could become even more difficult for the SEC to investigate other violations. Rather than bolstering
enforcement goals, the new policy requires the SEC to commit more time, more money, and more manpower to the
small number of cases in which it will seek admissions from wrongdoers. For this reason, the number of cases in
which the SEC insists on admission of wrongdoing will likely be sharply limited.
Further, the cases that would have been settled under the SEC’s old policy will now clog the court system, but with no
guarantee that defendants will be held liable. And the new policy is sure to delay the return of money to injured
investors during the process of prolonged litigation. This inevitable cost invites the question: is the possibility of
uncovering the truth more important than returning money to victims?
Despite being too early to tell how the SEC’s shift away from its blanket neither-admit-nor-deny policy will play out in
practice, there is no denying that the change is significant. For now though, it remains to be seen whether the benefit
of demanding admissions is worth the costs associated with such a requirement.
Toby Galloway is a partner at Kelly Hart & Hallman and the former chief trial counsel for the U.S. Securities and
Exchange Commission in Fort Worth. Colleen Deal is a lawyer in the firm’s litigation section.