The SEC has long allowed both individuals and corporations to settle enforcement actions under their “neither admit nor deny” policy. This policy is driven by the belief that if defendants are allowed to settle without admitting any wrongdoing, they are more likely to do so. Quicker settlements allow the SEC to avoid costly trials (that they might lose) and extract fines and penalties from accused wrongdoers efficiently. Also, under the “neither admit nor deny” policy, settling defendants could not deny that they were guilty – they just didn’t have to admit it.
This policy has come under scrutiny and criticism, especially as institutions involved in the most recent financial crisis have attempted to settle enforcement actions with the SEC without admitting any wrongdoing.
As a result of this pressure, SEC Chair Mary Jo White recently announced that her agency will seek to extract admissions of wrongdoing from companies in certain circumstances, especially in circumstances where large numbers of investors have been harmed.
“Public accountability in particular kinds of cases can be quite important and if we don’t get them, then we can litigate them,” said White at The Wall Street Journal’s CFO Network event.
Changing practices could lead to more litigation
Forcing companies to make admissions could lead them to battle it out in court, rather than acknowledge wrongdoing. These court cases will be expensive for the SEC to pursue, and will be embarrassing if the SEC is unable to obtain convictions that stick. As a result, there’s no doubt that the SEC will choose the companies from which it will insist on a guilty admission very carefully.
Are individual defendants next?
The answer has to be “yes.” Corporations only act through individuals. Thus, if the new SEC logic is that public accountability of corporations (read: admissions of guilt) in certain types of cases is important, this must also be true for the individuals who acted on the corporation’s behalf. This creates a perilous situation for individuals when it comes to their indemnification agreements and D&O insurance. Most of these contracts are written in a way that causes an individual to lose coverage if he or she admits guilt. Indeed, the individual may have to pay back any fees advanced, which could be bankrupting. In other words, some individual defendants – to avoid certain bankruptcy in the near term if nothing else – will be motivated to avoid admitting guilt. This will be true even to the point of allowing the SEC to subject them a lengthy and painful trial that they would have been willing to avoid if they could settle without admitting guilt.
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