S.E.C. Changes Its Policy on Firms’ Admissions of Guilt

The change is the first time that the S.E.C. has stepped back from its longstanding practice of allowing companies to settle fraud charges by paying a fine without admitting wrongdoing. The new policy will also apply to cases where a company or an individual enters an agreement with criminal authorities to defer prosecution or to not be prosecuted as part of a settlement.

Robert Khuzami, the director of enforcement at the S.E.C., said the agency would continue to use the “neither admit nor deny” settlement process when the agency alone reached a deal with a company in a case of civil securities law violations. Those types of cases make up a large majority of S.E.C. settlements.

The commission has been sharply criticized, in federal court and on Capitol Hill, for allowing companies to repeatedly settle fraud cases without admitting or denying the charges. Until last week, that policy had been applied even when a company acknowledged the same conduct to another government agency, often the Justice Department.

For example, the S.E.C. and the Justice Department announced on the same day last month that Wachovia bank would pay $148 million to settle charges that the bank reaped millions of dollars in profits by rigging bids in the municipal securities market, one of several such settlements announced last year by the two agencies.

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 based on the same facts with the S.E.C, Wachovia agreed to settle the charges “without admitting or denying the allegations.” Wachovia is now part of Wells Fargo.

Under the new policy, a civil settlement will cite the admission of conduct or conviction in the corresponding criminal case, Mr. Khuzami said. But the S.E.C.’s enforcement staff will have discretion whether to use relevant facts from the criminal case in its own court documents for the civil case.

Last year, the S.E.C. encountered the conflict between simultaneous admission and nonadmission of facts in three other cases involving bid-rigging by large Wall Street firms. S.E.C. officials declined to comment on whether additional cases could result from the Wall Street bid-rigging.

Mr. Khuzami said the policy change had been under consideration since last spring and had been discussed with commissioners “over the last several months.”

The S.E.C. has defended the practice of allowing companies to avoid admitting or denying charges, saying that by settling with companies, it saves the commission the far greater expense — and potential risk — of fighting them in court. The agency says it is usually able to get as much money from a settlement as it could win in a protracted legal case, with money being returned to investors more quickly.

In drafting a settlement of securities fraud charges, companies frequently seek the “neither admit nor deny” language for fear that their acknowledgment of the conduct could be used against them in shareholder lawsuits seeking damages. But legal experts say that safe harbor does not apply when a company has admitted facts in a criminal case.

Securities law experts differed over the practical importance of the change, with some saying it is a notable acknowledgment by the agency of flaws in its system, and others suggesting that it will not affect most S.E.C. cases, which involve only civil charges. Since the S.E.C. is not empowered to bring criminal cases it refers potential criminal cases to the Justice Department.

“It’s an important development because it is a change of policy,” said James D. Cox, a professor at Duke Law School and co-author of a securities regulation textbook. “It’s a small step forward in addressing the concerns” that a federal judge recently voiced about the S.E.C.’s broader settlement policy.

But David S. Ruder, an emeritus professor at Northwestern School of Law and a former S.E.C. chairman, said the change was merely “a tweaking” of policy that would not significantly reduce the commission’s reliance on the “neither admit nor deny” policy to settle cases.

The practice has been in use for years by many government agencies in addition to the S.E.C. The Justice Department has, in at least one case, allowed a company both to admit and deny similar charges in a single instance. Last November, Merck pleaded guilty to a criminal charge that it promoted its painkiller Vioxx for an unapproved use.

At the same time, it settled a broader array of civil charges by the Justice Department that it made misleading statements about the drug’s safety. In that settlement, Merck expressly denied that it engaged in wrongful conduct.

It has been the S.E.C.’s application of this policy, however, that has attracted renewed criticism, particularly in cases related to the 2008 financial crisis. The House Financial Services committee said it would conduct a hearing to examine the practice early this year.

In November, Jed S. Rakoff, a Federal District Court judge in New York, rejected an S.E.C. settlement with Citigroup over securities fraud charges and was sharply critical of the practice. He said the “neither admit nor deny” language deprived the court of the facts necessary to determine if the punishment was adequate because it meant that there were no established facts on which to base a decision.

The Citigroup case will not be affected by the policy change, because there is no accompanying criminal charge. The S.E.C. has appealed Judge Rakoff’s rejection of its Citigroup settlement.

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