THE NEW ENFORCEMENT SETTLEMENT POLICY

The Division of Enforcement altered its long standing policy on one of its key settlement terms last week. Traditionally, the Division has permitted defendants to settle enforcement actions without admitting or denying the allegations in the complaint expect as to jurisdiction. Under a revision to the policy announced the Division will no longer permit those convicted, or who otherwise admited the facts in a parallel criminal action, to settle with the Commission based on “not admitting or denying” the facts.

The Division announced this change at a time of increasing concern regarding the “not admit or deny” procedure it has traditionally used. Some courts have raised questions about the issue. Lawmakers on Capital Hill have also expressed concern about this practice. Some commentators have also questioned the policy.

The Division’s announcement appears to be an updating of its policies to reflect current enforcement trends rather than a radical revision of its policies. The “not admit nor deny” practice traces to the early days of the Division in the 1970s. The policy arose from concerns that admissions could be used in parallel civil class actions. At the time there were few parallel criminal and civil securities investigations. While the DOJ did in fact bring criminal cases during the period, frequently they would follow a Commission investigation and a formal criminal reference of the matter by the agency to criminal enforcement authorities.

Today as many as 55% of the Commission’s civil law enforcement investigations are paralleled by criminal securities inquiries. Many of the Commission’s civil cases are filed in tandem with a criminal action by the DOJ. This is an outgrowth of the President’s task force and its predecessor. It also reflects Attorney General Eric Holder’s emphasis on parallel proceedings to muster the full resources of the government.

The impact of these task forces and the Attorney General’s directive is evident in the recent insider trading actions and the FCPA cases. In the Galleon and expert network insider trading cases, the Commission has worked closely with the U.S. Attorney’s Office in Manhattan, in brining a series of parallel insider trading cases. Typically the criminal cases have been resolved first either with a conviction or a guilty plea. Following those admissions the Commission settled its parallel case on a neither admit nor deny basis.

The same pattern is evident in the FCPA cases. There the defendant frequently resolves the criminal action with the DOJ by entering into a non-prosecution agreement in which there are extensive admissions but settles with the SEC without admitting or denying the facts. Since the facts have been determined in the criminal cases the potential civil liability rationale behind the neither admit nor deny policy no longer exists. Viewed in this context it is clear that the change represents an updating to reflect current enforcement trends rather than a radical turn in enforcement policy.

Likewise, it does not appear to be an outgrowth of the litigation concerning the rejection by the Court of the Citigroup settlement. The U.S. Attorney’s Office did not bring a parallel criminal case in that instance. Judge Rakoff’s concerns in that case, which included the policy, centered more on the apparent lack of any explanation for the allegations of intentional wrong doing mismatched with charges and a settlement grounded in negligence. In fact the Commission continues to litigate in the Second Circuit regarding the rejection of its settlement in Citigroup.

Perhaps the more important question is whether this change signals a reexamination of other enforcement policies. Key settlement policies should in fact be carefully examined. Today the Commission seems to be placing far more emphasis on large corporate penalties than remedial procedures which can prevent a reoccurrence of the wrongful conduct. Indeed, the Commission recently requested that lawmakers give it increased fine authority despite no indication that that its current power is inadequate. Yet there is a serious question as to whether corporate fines represent anything more than a “cost of doing business” which is passed onto innocent shareholders while.

This emphasis also seems to detract from focusing on remedial procedures to prevent a reoccurrence in the future. In Citigroup and other cases questions have been raised regarding the adequacy of procedures included in SEC settlements. Yet a key focus of the enforcement program is to prevent the reoccurrence of violations, a point which has traditionally been achieved by including meaningful new procedures in settlements. Perhaps now the Commission will move forward with a full reexamination of its settlement policies.