December 4, 2021

Common Sense: S.E.C.’s New Chief Promises Tougher Line on Cases

In a departure from long-established practice, the recently confirmed chairwoman of the Securities and Exchange Commission, Mary Jo White, said this week that defendants would no longer be allowed to settle some cases while “neither admitting nor denying” wrongdoing.

“In the interest of public accountability, you need admissions” in some cases, Ms. White told me. “Defendants are going to have to own up to their conduct on the public record,” she said. “This will help with deterrence, and it’s a matter of strengthening our hand in terms of enforcement.”

In a memo to the S.E.C. enforcement staff announcing the new policy on Monday, the agency’s co-leaders of enforcement, Andrew Ceresney and George Canellos, said there might be cases that “justify requiring the defendant’s admission of allegations in our complaint or other acknowledgment of the alleged misconduct as part of any settlement.”

They added, “Should we determine that admissions or other acknowledgment of misconduct are critical, we would require such admissions or acknowledgment, or, if the defendants refuse, litigate the case.”

Ms. White said that most cases would still be settled under the prevailing “neither admit nor deny” standard, which, she said, has been effective at encouraging defendants to settle and speeding relief to victims.

The policy change follows years of criticism that the S.E.C. has been too lenient, especially with the large institutions that were at the center of the financial crisis. Bank of America, Goldman Sachs, Citigroup and JPMorgan Chase were among the defendants that settled charges related to the financial crisis while neither admitting nor denying guilt, although Goldman was required to admit that its marketing materials were incomplete.

That this approach became such a heated public issue is in large part because of the provocative efforts of Judge Jed S. Rakoff of Federal District Court, who has twice threatened to derail settlements with large financial institutions that neither admitted nor denied the government’s allegations.

In late 2011, he ruled that he couldn’t assess the fairness of the agency’s settlement with Citigroup in a complex mortgage case without knowing what, if anything, Citigroup had actually done. In his ruling, he said that settling with defendants who neither admit nor deny the allegations is a policy “hallowed by history but not by reason.”

He described the settlement, which was for $285 million, as “pocket change” for a giant bank like Citigroup. Other judges have followed Judge Rakoff’s lead, and an appeal of his Citigroup ruling is pending before the Court of Appeals for the Second Circuit.

The new policy would seem to vindicate Judge Rakoff, at least in spirit, but Ms. White said the decision was rooted in her experience as United States attorney in New York, where defendants in criminal cases are almost always required either to enter a guilty plea or go to trial.

“Judge Rakoff and other judges put this issue more in the public eye, but it wasn’t his comments that precipitated the change,” she said. “I’ve lived with this issue for a very long time, and I decided it was something that we should review, and that could strengthen the S.E.C.’s enforcement hand.” (Judge Rakoff, who is presiding over a trial in Fresno, Calif., said he couldn’t comment, citing the appeal of his Citigroup ruling.)

Those concerned that Ms. White, who before her confirmation as chairwoman of the S.E.C. was head of the litigation department at the prominent corporate law firm Debevoise Plimpton, might be too cozy with the big banks and corporations that were formerly her clients, can breathe easier. Even some of the S.E.C.’s harshest critics were at least somewhat mollified.

“It’s an important step in the right direction,” said John Coffee, a professor at Columbia Law School and a vocal critic of S.E.C. settlements he deems too lenient. “There’s clearly a public hunger for accountability. Mary Jo White has shown she sensitive to this.”

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