I was initially elated when I first read that the SEC was getting rid of its “neither confirm nor deny” language. However, the more I drilled down to the details it became clear that it was a narrow change and not the reform I thought had been inspired by US District Court Judge Jed Rakoff. I should have known better.
In a nutshell, the SEC says that it will no longer allow those companies that are found guilty of violating securities laws to then settle civil cases linked to their criminal behavior by choosing to “neither admit nor deny” the wrongdoing. So, from now on, if a firm is found guilty of a crime, it cannot then settle the civil side of the matter via the murky “neither admits …” language.
“This policy change does not affect our traditional ‘neither admit nor deny’ approach in settlements that do not involve criminal convictions or admissions of criminal law violations,” said Robert Khuzami, the SEC’s Director of the Division of Enforcement, recently in a prepared statement. “In particular, it is separate from and unrelated to the recent ruling in the Citigroup case, which does not involve a criminal conviction or admissions of criminal law violations. We have appealed that ruling and the reasons for that appeal are described in the public statement I issued at that time.”
So, translation: it was a flawed policy from the start, it should have been rectified decades ago, and it really doesn’t change much.
Sadly, Khuzami evaporated my speculation that Judge Rakoff had won the day with his inspiring stance to not rubber stamp a potential, $285 million settlement between the SEC and Citigroup. To recap, Judge Rakoff rejected the SEC’s cryptic “neither admit nor deny” clause used for countless settlements. The judge argued that this settlement process failed to clear the air about what really happened at Citi after it sold $1 billion in mortgage-bond deals, circa 2007. The SEC has appealed Rakoff’s ruling and has been arguing that it must retain the option of settling with a firm in this way, which allows it to sidestep the admission of guilt via the “neither admit” clause.
The ultimately confusing policy change creates more questions than it answers. First, why did the SEC allow firms that had broken criminal law to settle civil liabilities in this way for so many years? Also, if Judge Rakoff’s actions and arguments were not the impetus for this change, then what was? Along those lines, it’s very disturbing that there is no transparency into how this policy change came about—an occasional statement doesn’t really cut it. It’s also infuriating that the regulators can demand transparency from the industry but they then slam the door on any attempts by investors, federal judges and others to get clarity on their policy-making processes.
I did find solace in the fact that at least one of the SEC’s many absurdities will be a thing of the past. Maybe that’s as good as it gets with the regulators.
Need a Reprint?
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