As some may have heard, on last Friday afternoon, the SEC decided to inform the world of its intention to change the settlement language in its cases.  The SEC has now determined that, if a person or entity has plead to or been found guilty of a crime, the SEC will no longer allow the party to “neither admit nor deny” the underlying factual allegations contained in a parallel SEC action as part of a settlement of that SEC action.  Of course, where there is no such criminal action, the old language will remain.

Obviously, this policy change resulted from Judge Rakoff’s decision in the Citi case where he rejected the SEC proposed settlement.  Interestingly, despite Judge Rakoff’s criticism and the SEC’s subsequent appeal of his decision, this new policy STILL DOES NOT address Judge Rakoff’s concerns because, in that case, there was no underlying criminal action against Citi!!!  In typical SEC fashion, the solution simply does not fit the problem.

The SEC’s approach to this problem does not correct the serious deficiencies contained in its settlement process.  For example, despite the fact the SEC is a government agency, it is only a civil agency and has no criminal authority.  As such, the allure of an admission of “guilt” in SEC settlements truly misses the point.  It is true that federal judges almost always will not accept a guilty plea in a criminal case where the defendant refuses to acknowledge their guilt– sometimes referred to as an Alford plea.  However, the SEC is not seeking a criminal plea in its cases.  This new policy clearly is seeking to blur the lines between the SEC’s civil jurisdiction and the implications derived from criminal prosecutions.  The SEC, thus, has an obligation to not confuse its role in this process by attempting to undertake a “criminal” resolution of its civil settlements.

Additionally, the SEC’ssettlement language change does not address the significant problems with its “Obey-the-Law” injunctions.  That is, the SEC’s “Obey-the-Law” injunctions do nothing more than require the person or entity subject to said injunction to follow the statute or regulation cited in the settlement.  Query:  doesn’t everyone have to follow the law anyway?  The language change does not correct the overbroad character of the SEC’s injunctions, or the fact the SEC, rarely– if ever– obtains a contempt sanction against a person or entity that may violate a previously issued SEC injunction.  Instead, the SEC, generally, obtains another injunction against that person or entity.  One wonders how changing the settlement language to obtain an admission addresses these significant structural problems with the SEC’s “Obey-the-Law” injunctions or deters potential recidivists.

Further, there was nothing in the SEC’s pronouncement that would indicate the SEC would be willing to compromise on other aspects of relief the SEC ordinarily seeks in these cases.  There was no mention if the SEC would forego an officer or director bar, disgorgement or civil penalties, among other relief, from a defendant in exchange for agreeing to this new language.  Does the SEC really think a person or entity is going to agree to this language change without receiving something in exchange?  We really hope the SEC is not under that belief. 

However, assuming the SEC has nothing but the purest intent and its shifting position is because it believes it may do some good in subsequent private civil lawsuits, that belief, unfortunately, is sorely misplaced.  From an evidentiary standpoint, the SEC’s settlement language change will have minimal to no bearing on subsquent private civil lawsuits.  The SEC’s insistence on an admission provides no added benefit for a subsequent civil plaintiff since any subsequent civil plaintiff could easily rely upon the criminal conviction without any reference to SEC activity in such a private lawsuit.

Finally, the SEC’s insistence on this language change will, most likely, make SEC civil settlements less likely.  There would be no point or advantage gained by a potential defendant settling with the SEC under these terms.  The person or entity could simply ignore the SEC action, and allow the SEC to obtain a default judgment against the the person or entity.  The defendant would, therefore, have avoided admitting to any factual allegation proposed by the SEC, and, as discussed above, there would be no appreciable change in the relief granted to the SEC.

Accordingly, the SEC’s change in its settlement language may result in the reverse effect for SEC settlements.  That is, instead of the SEC settlement adding to deterrence, the agency’s work would be less relevant since defendants would simply bypass the agency, and ignore any efforts by the SEC to obtain a judgment.  Consequently, we are still waiting for the SEC to seriously address the systemic problems in its settlement process.  Our guess is we will be waiting for sometime.