DealBook: Congress to Examine S.E.C. Settlement Policy

Andrew Harrer/Bloomberg NewsRepresentative Spencer Bachus, the chairman of the House Financial Services Committee.

8:27 p.m. | Updated

WASHINGTON — The Securities and Exchange Commission’s practice of settling cases while allowing corporations or other defendants to neither admit nor deny the charges will be the subject of a hearing early next year by the House Financial Services Committee.

The committee chairman, Representative Spencer Bachus, Republican of Alabama, said Friday that “the S.E.C.’s practice of using ‘no-contest settlements’ has raised concerns about accountability and transparency.” He said the hearings were supported by both Republican and Democratic lawmakers.

Settlements of enforcement actions using the “neither admit nor deny” construct have been the focus of increased scrutiny, including in the recent Citigroup case, where United States District Court Judge Jed S. Rakoff rejected a $285 million settlement between the financial company and the commission.

Judge Rakoff said that he could not determine whether the settlement was fair because there were no proven or accepted facts in the case on which to evaluate the settlement.

The S.E.C. accused Citigroup of fraud for selling a portfolio of mortgage-related securities to investors without disclosing that it had bet against many of the items in the portfolio.

But Citigroup would not admit that it did anything wrong, leading Judge Rakoff to say that there was no basis on which to make a judgment. He therefore rejected the agreement and ordered the two sides to prepare for a trial. The S.E.C. said this week it would appeal the ruling.

Representative Barney Frank of Massachusetts, the leading Democrat on the committee, praised Mr. Bachus for announcing a hearing. “The policy of signing agreements without forcing firms to admit or deny wrongdoing raises serious issues,” he said.

The S.E.C. has defended the agreements, saying that it allows the commission to bring enforcement actions against companies and extract penalties without having to bear the costs and the uncertain outcome of a trial.

Robert Khuzami, the S.E.C.’s director of enforcement, says that the commission usually achieves the same settlement by this method that it might expect at trial and he notes that other enforcement agencies also commonly employ the practice.

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