The two law enforcement agencies, together with other federal and state regulators, announced Thursday that they had wrested a $148 million settlement from Wachovia Bank, now part of Wells Fargo, on charges that the bank reaped millions of dollars in profits by rigging bids in the municipal securities market.
The settlements are curious because they seem diametrically opposed. In the Justice Department settlement, Wachovia said it “admits, acknowledges and accepts responsibility for” manipulating the bidding process in the sale of derivatives on tax-exempt bonds to institutional investors like cities, hospitals and pension plans over a six-year period ending in 2004.
But in fashioning a settlement with the S.E.C. for the same actions, based on the same facts, Wachovia agreed to settle the charges “without admitting or denying the allegations.”
Why the S.E.C. would allow a company to avoid admitting conduct that it has already admitted elsewhere is at the center of a continuing debate over how the agency polices Wall Street. The S.E.C. has settled three previous cases involving municipal bond bid-rigging in the same way over the last year. Other federal and state agencies, including the Office of the Comptroller of the Currency and a group of state attorneys general, settled cases on Thursday with Wachovia on the same terms.
The “neither admit nor deny” practice, which has been in use for years, has attracted renewed criticism recently. A federal judge in New York last month rejected an S.E.C. settlement with Citigroup over securities fraud charges, saying that the “neither admit nor deny” language deprived him of the facts necessary to determine if the punishment was adequate.
Wachovia’s settlement, like Citigroup’s and dozens of other S.E.C. agreements with Wall Street firms in recent years, also includes an injunction against future violations of the antifraud provisions of federal securities laws. Wachovia has agreed not to violate the same law three times in the last seven years, including in April of this year.
The failure to admit conduct that has already been admitted has some legal experts baffled. “It just doesn’t compute,” said Cornelius Hurley, the director of the Boston University Center for Finance, Law Policy and a former counsel to the Federal Reserve’s board of governors. “I think an explanation is deserved from the S.E.C. as to why there is this apparent discrepancy.”
John Nester, an S.E.C. spokesman, said these settlements should be viewed as a package, not separately. “This is a joint state and federal resolution that includes an admission and compensates victims.”
Robert Khuzami, the commission’s director of enforcement, said in a recent interview that the S.E.C. fashions its settlements using the “neither admit nor deny” language because it believes it often results in the same penalties it thinks it would achieve in a lengthy, expensive court trial.
In addition, he said, companies demand the language for fear that an admission of securities fraud could then be used against them in class action or shareholder lawsuits seeking damages.
Yet that could be the case for Wells Fargo, according to three former S.E.C. lawyers, who spoke on the condition of anonymity because they now represent clients before the S.E.C. In interviews, the lawyers said that the admission in the settlement with the Justice Department could probably be used to support evidence of fraud in private civil lawsuits against Wells Fargo.
Wells Fargo, which said the case involved employees who were no longer at the company, declined to comment on the discrepancies between the two settlements.
The differences between the two settlements include a nonprosecution agreement signed by the Justice Department with Wells Fargo in which the bank admitted that several former employees had committed criminal violations of the Sherman Antitrust Act.
The Justice settlement says simply that Wachovia “entered into unlawful agreements to manipulate the bidding process and rig bids.”
The S.E.C., which has the authority to bring only civil charges, forged an agreement in which Wachovia neither admits nor denies that it violated Section 17(a) of the Securities Act of 1933, which forbids fraud in securities offerings.
The S.E.C. complaint gives six pages of detail on “representative fraudulent transactions” — implying it could supply much more.
Mr. Khuzami, the S.E.C.’s enforcement director, defends the “neither admit nor deny” settlements in part by saying that because the S.E.C. lays out such detail in its complaints, there can be no doubt what occurred.
“I think that people looking at the entirety of that package,” he said, “would be hard-pressed to come away with a conclusion other than, ‘They did something wrong here.’ ”
Judge Jed S. Rakoff of the United States District Court in Manhattan disagrees. He rejected the S.E.C.’s recent settlement with Citigroup, saying it “is neither fair, nor reasonable, nor adequate, nor in the public interest” because it does not provide the court “with any proven or admitted facts upon which to exercise even a modest degree of independent judgment.”
Judge Rakoff will not rule on the adequacy of the Wachovia settlement, which the S.E.C. filed in federal district court in New Jersey.
Article source: http://feeds.nytimes.com/click.phdo?i=a8d8e47b7e36dc84ea3007ba043d9d17
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