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

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.