The SEC's long established settlement practice of
resolving enforcement actions without requiring an admission of liability -
that is, on a neither admit nor deny basis - came under scrutiny again last
week. On May 17, 2012 a House Committee held hearings on the question. Earlier
in the week the Commission and Citigroup filed briefs in the Second Circuit
Court of Appeals in SEC v. Citigroup, the enforcement action in which
District Court Judge Jed Rakoff rejected the proposed settlement while citing
the practice. The Second Circuit filings presented the unusual specter of the
agency and the defendant in a major enforcement action combining forces.
In defense of its position in each venue, the SEC
correctly points out that the "neither admit nor deny" policy is one of long
standing. Since the early days of its enforcement program the agency has
utilized this policy, although it has been bolstered and tweaked. A requirement
was added which precludes a settling defendant from publically repudiating the
facts in the SEC complaint. Recently, the Enforcement Division, with the
approval of the Commission, began requiring that parties who have admitted the
underlying facts in another proceeding or been convicted acknowledge those
admissions in the settlement papers with the Commission, Nevertheless, the
policy has remained constant.
In testimony before the House, and in the Second Circuit,
the agency also correctly pointed out that its policy is consistent with that
of many other federal and state law enforcement agencies and encourages
settlement. In fact the policy as applied by the SEC is more stringent than
that of many other agencies which do not preclude a settling defendant from
denying the underlying facts. The policy also fosters settlement by avoiding
needless litigation by defendants seeking to avoid the potential liability that
would arise from related private actions if they were required to make
admissions in a settlement with the SEC.
Despite the validity of these points, they fail to deal
with the underlying issue in Citigroup, a question also involved Bank
of America. In both cases the Court raised significant issues about the
proposed settlements, questioning the "neither admit nor deny" policy, the
adequacy of the settlement terms and the facts presented to the Court. In both
cases the Court stated it had insufficient facts from which to evaluate the
proposed settlement. In Bank of America the Court repeatedly questions
the propriety of not naming individuals as defendants. In Citigroup the
Judge stated that the factual allegations in the complaint depicted an
intentional fraud, yet the charges were negligence.
If the "neither admit nor deny" policy was the key issue,
the Court would not have signed off in the Bank of America settlement.
It did, but only after receiving additional factual material from the SEC and
the NY AG who filed a similar action. After reviewing that evidence, and a
revision of the remedies by the parties, the Court entered the settlement on a
"neither admit nor deny" basis. This is fully consistent with Judge Rakoff's
determinations in other SEC cases as the agency has noted.
In Citigroup the Court did not enter the
settlement. It was not furnished with any additional evidentiary materials and
the parties did not offer to modify the proposed remedies. While the parties
answered a series of questions, the Court continued to claim it had
insufficient facts to evaluate the settlement. Thus, unlike Bank of America,
where the key question about the complaint was answered, in Citigroup it
was not - the apparent mismatch between the facts and the charges remains
The resolution of this seeming mismatch is of critical
importance. Commission enforcement actions serve not just to address the
specific violations in the case but also to give notice about the views of the
agency on important questions of law and policy. Each case makes a statement
and is part of a larger overall national enforcement program.
When the documents prepared by the Commission contain
what appears to be a fundamental inconsistency, it muddles the enforcement
message. In Citigroup that message has been lost through the
inconsistency as well as in the dialogue about the Commission's policy.
Regardless of the outcome of the Congressional hearings and the Citigroup appeal,
if the Commission is going to have an effective enforcement program it must
deliver a clear message.
ABA Program: The
New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to
Reevaluate? Tuesday June 5, 2012, 12:00 PM to 1:30 PM EST, Live in Washington,
DC and webcast.
Moderators: Thomas O. Gorman,
Partner, Dorsey & Whitney LLP, Washington, D.C. and Frank C. Razzano,
Partner, Pepper Hamilton, LLP, Washington, D.C.
Panel: John D. Buretta, Deputy
Asst. AG, Criminal Division, DOJ, Washington, D.C.; Charles E. Cain, Deputy
Chief FCPA Unit, SEC, Washington, D.C.; France Chain, Senior Legal Analyst,
Anti-Corruption Division, OECD, Paris, France; Prof. Mike Koehler, Butler
University, Indianapolis, Ind.; Hon. Stanley Sporkin, Washington, D.C.; Greg D.
Andres, Partner, Davis Polk, New York, New York; Eric Bruce, Partner, Kobre
& Kim, New York, New York. Live Presentation from Washington, DC.
Co-hosted by Dorsey &
Whitney LLP and Pepper Hamilton, LP at Penthouse at Hamilton Square, 600
Fourteenth St., N.W. Washington, D.C. Click here for more information (here)
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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