The Securities and Exchange Commission (“SEC”) announced that it may change the way it permits banks, brokerage firms, and others to settle civil charges that the SEC has brought against them. Historically, the SEC has not required wrongdoers to admit fault when they settled securities fraud charges. According to SEC Chairperson Mary Jo White, the SEC considering making an admission of fault a condition to certain settlements. Investment fraud victim could benefit greatly from such a policy.
The historic lack of admissions of fault as part of SEC settlements has been an enormous benefit for the settling parties, as there was no admission that could be used against the wrongdoer in private lawsuits and FINRA arbitrations. Requiring companies to accept liability as part of settlements would be a monumental change. While fines levied as part of SEC settlement can be substantial, the fines often are substantially less than the potential liability that companies face from related civil lawsuits and FINRA arbitration claims.
The lack of a requirement of an admission of fault likely persuaded some to accept SEC settlements, and the attendant monetary fines and sanctions, rather than go to trial. But the SEC may require certain parties accused of securities to accept liability in an effort to deter securities fraud in the first place. Because admissions of fault likely could be used against the accused in civil lawsuits and FINRA arbitration claims, the financial cost of engaging in securities fraud could rise substantially, thereby serving as a deterrent. Those who refuse to admit fault would have to fight the SEC charges in court.
The practice of allowing companies to enter into admission-free regulatory settlements, even in the most egregious cases of massive financial fraud, has been criticized by some. U.S. District Court Judge Jed S. Rakoff has argued the ability to avoid admitting liability can allow companies to treat settlements as just a “cost of doing business.” In 2011, that judge rejected a proposed SEC settlement with Citigroup Inc. that would require Citigroup to pay $285 million to settle allegations that the bank misled investors in a 2007 mortgage-bond deal. Investors lost more than $700 million in that deal, according to the SEC. That decision currently is on appeal.
If the SEC is serious about protecting the integrity of the securities markets and protecting investors, it will press forward and require financial fraudsters to admit fault when settling regulatory claims. Without the threat of meaningful financial exposure that could arise from the admissions, financial institutions likely will continue to engage in massive securities fraud.