Admissions in SEC Enforcement Cases: The Revolution That Wasn't

Author:David Rosenfeld
Position::Assistant Professor, Northern Illinois University College of Law
Pages:113-184
SUMMARY

In 2013, the SEC departed from its long-standing policy of settling enforcement matters on a no-admit/no-deny basis, and for the first time began to require admissions when settling certain cases. The new admissions policy was greeted with considerable concern by many who thought it would lead to fewer settlements, more litigation, and a decline in the effectiveness of SEC enforcement. After more ... (see full summary)

 
FREE EXCERPT
113
Admissions in SEC Enforcement Cases:
The Revolution That Wasn’t
David Rosenfeld *
ABSTRACT: In 2013, the SEC departed from its long-standing policy of
settling enforcement matters on a no-admit/no-deny basis, and for the first
time began to require admissions when settling certain cases. The new
admissions policy was greeted with considerable concern by many who thought
it would lead to fewer settlements, more litigation, and a decline in the
effectiveness of SEC enforcement. After more than four years, a full assessment
of the policy is in order. The SEC continues to report record enforcement
numbers and has touted the admissions policy as a great success. However,
this Article empirically demonstrates that the SEC has obtained admissions in
a very small number of cases since adopting the new policy, and on only a few
occasions in cases involving the most serious charges, namely scienter-based
fraud. Moreover, it shows that the SEC has applied the new policy
inconsistently and haphazardly, treating like cases differently—a problem
that is compounded by a complete lack of transparency in the process. This
Article contends that these trends reveal a deliberate strategy of
accommodation on the part of the SEC, through which the agency has
trumpeted a message of tough enforcement and public accountability, while
in reality continuing business as usual. In light of these issues, this Article
concludes that the admissions policy should be reconsidered or abandoned
altogether.
I.INTRODUCTION ............................................................................. 114
II.THE GENESIS OF THE ADMISSIONS POLICY .................................... 118
A.NO-ADMIT/NO-DENY .............................................................. 118
B.CRITICISM OF NO-ADMIT/NO-DENY ......................................... 120
C.THE NEW ADMISSIONS POLICY ................................................. 121
1.Convictions, Pleas, and Admissions in Parallel
Actions ........................................................................... 121
2.Admissions in SEC Settlements .................................... 122
* Assistant Professor, Northern Illinois University College of Law. I would like to thank
Megan Yentes and Ryan Lowe for their excellent research assistance.
114 IOWA LAW REVIEW [Vol. 103:113
D.CRITICISM AND CONCERNS ABOUT THE ADMISSIONS
POLICY ................................................................................... 124
E.THE JUDICIAL AFTERMATH ...................................................... 126
III.ANALYSIS ....................................................................................... 127
A.SEC ENFORCEMENT BY THE NUMBERS ...................................... 127
B.THE ADMISSIONS CASES ........................................................... 129
1.The Admissions Cases by the Numbers ....................... 129
2.The Charges .................................................................. 138
i.Fraud ........................................................................ 138
a.Entities ............................................................. 140
b.Individuals ....................................................... 144
ii.Non-Fraud Charges ................................................... 146
3.Classification of Cases ................................................... 147
4.Form of the Admissions ................................................ 148
IV. ASSESSMENT AND CRITIQUE .......................................................... 149
A.ABSENCE OF THE MOST SERIOUS CHARGES ............................... 150
B.LACK OF CLEAR STANDARDS .................................................... 155
C.LACK OF CONSISTENCY ............................................................ 157
1.Lack of Consistency Between Similar Cases ................ 157
2.Lack of Consistency Between Entities and
Individuals in the Same Case ........................................ 164
3.Other Lack of Consistency Within the Same Case ..... 168
D.LACK OF TRANSPARENCY ......................................................... 170
V.CONCLUSION ................................................................................ 175
I. INTRODUCTION
In June 2013, the Secu rities and Exchange Commission (“SEC”) made a
major change to its policy regarding settlements: Instead of routinely settling
matters on a no-admit/no-deny basis, the SEC began to require admissions
from settling respondents and defendants in certain cases.1 The change was a
reaction to stinging criticism that the agency was willing to sweep wrongdoing
under the rug, or even worse, that it was acting collusively with wrongdoers,
allowing them to escape responsibility for their actions by paying a fine—to
companies, a mere cost of doing business—without ever having to own up to
the wrongfulness of their acts.2 Former Chair Mary Jo White described the
new policy as a recognition that sometimes “monetary penalties and
1. See infra Part I.C.2.
2. See infra Part I.B.
2017] ADMISSIONS IN SEC ENFORCEMENT CASES 115
compliance enhancements are not enough. An added measure of public
accountability is necessary.”3
The new policy marked a radical departure from the way the agency had
traditionally done business, and it was met with considerable consternation
from the defense bar and others who were concerned over its potentially
deleterious consequences. Although Chair White and SEC enforcement staff
insisted that admissions would only be required in egregious cases—and
no-admit/no-deny would otherwise continue to be the norm—many voiced
their concerns over the collateral consequences that admissions could have in
private securities actions, particularly for large, deep-pocketed institutions.4
Such critics predicted that these large institutions would be unwilling to settle
if settling required admissions.5 The result would be an increase in litigation
which could cripple the SEC’s enforcement program.6 When the policy was
first disclosed, one prominent law professor told the Wall Street Journal that the
change “would be immense” because admissions could be used in class-action
lawsuits and “[t]he Goldman Sachs and Morgan Stanleys of this world . . . do
not want to admit guilt.”7 A defense lawyer, and former SEC enforcement
attorney, told the same publication that the cost of follow-on securities
litigation could be so large that companies might decide to take their chances
battling the SEC in court rather than settling.8 The former director of the
SEC’s San Francisco office, now a defense lawyer, called the new policy
“troubling,” and predicted that in the face of potentially massive collateral
damages, “companies and their officers will be incentivized to take more cases
to trial,” straining the SEC’s “already limited enforcement resources further”
and leaving “less time to pursue new investigations and shut down ongoing
frauds, with any incremental benefit from seeing bad actors admit their
wrongdoing offset by a delay in any financial recovery for investors (if such
recovery can be had at all).”9 He concluded that “the SEC has unfortunately
moved in a dangerous direction that could have monumental implications for
the agency’s ability to fulfill its core mission of protecting investors.”10
3. Mary Jo White, Chair, SEC, Speech at the Council of Institutional Investors Fall
Conference: Deploying the Full Enforcement Arsenal (Sept. 26, 2013) (t ranscript available at
https://www.sec.gov/news/speech/spch092613mjw).
4. See infra Part I.D.
5. See infra Part I.D.
6. See infra Part I.D.
7. Jean Eaglesham & Andrew Ackerman, SEC Seeks Admissions of Fault, WALL ST. J., (June 18,
2013, 8:51 PM) (quoting Professor James Cox), https://www.wsj.com/articles/SB1000142412788
7324021104578553931876196990.
8. Id. (quoting attorney Stephen Crimmins); see also Daniel Fisher, Why Settling with the SEC Can
Be Worse Than Losing at Trial, FORBES (Jan. 29, 2014, 8:13 AM), https://www.forbes.com/sites/
danielfisher/2014/01/29/why-settling-with-the-sec-can-be-worse-than-losing-at-trial/#6d1f834e14b5.
9. Marc Fagel, The SEC’s Troubling New Policy Requiring Admissions, 45 SEC. REG. & L. REP.
(BNA) 1172, 1173 (2013).
10. Id. at 1175.

To continue reading

FREE SIGN UP