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SEC Continues Fight Over ‘No Admit No Deny’ Policy

When Mary Jo White, the head of the Securities and Exchange Commission (SEC), announced in June that the agency would push more companies to admit wrongdoing in cases of egregious fraud or serious harm to investors, some saw it as a refreshing sign the agency wanted to hold those responsible for the 2008 financial meltdown accountable.

But since that announcement, the SEC has continued to allow defendants in enforcement probes to settle without admitting or denying the agency’s charges. Although SEC policy has been tweaked in recent years, these adjustments don’t amount to the sweeping change that many were hoping for in the aftermath of the financial crisis.

Just this week, when the agency announced enforcement settlements with 22 firms accused of short selling violations, each settlement contained the “neither-admit-nor-deny statement.”

And while the SEC has started pressing for admissions of wrongdoing in high-profile cases—including recent enforcement actions against JPMorgan Chase and hedge fund manager Philip A. Falcone—other cases suggest the new policy is being applied unevenly.

Jonathan Weil, a writer for Bloomberg News, questioned why the SEC did not secure an admission of wrongdoing in a recent enforcement action against Ebrahim Shabudin, who was accused of hiding losses at a bank that collapsed after receiving federal bailout assistance:

So see if this makes sense to you. Falcone, who hasn’t been accused of any crimes, was required to acknowledge a bunch of awful facts without admitting legal liability. Yet Shabudin, who was charged criminally over a bank collapse that cost taxpayers hundreds of millions of dollars, was allowed to cut a deal with the SEC without admitting anything at all. Here’s how to describe this newfangled policy in two words: ad hoc.

The SEC’s no-admit actions also came under fire in December 2011 when U.S. District Judge Jed Rakoff threw out a proposed settlement between the SEC and Citigroup, writing that “a judgment that does not involve any admissions and that results in only very modest penalties is…viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies.” Judge Rakoff’s message reverberated with legions of Americans seeking accountability for the 2008 meltdown.

SEC officials have defended the no-admit settlements, arguing that they are an essential part of the agency’s enforcement efforts. These settlements “bring accountability,” said Andrew Ceresney, the SEC’s co-director of enforcement, speaking at a recent panel hosted by Corporate Crime Reporter. “The facts are aired in detail in our orders. The defendant doesn’t have any ability to deny those facts. We have accountability. We have deterrence. Our sanctions are significant. And quick justice is better than delayed justice in terms of deterrence. No question about that.” Furthermore, he said, no-admit settlements allow the agency to seek immediate relief for investors and conserve limited resources.

Other panelists took a different view. Robert Weissman, the president of Public Citizen, used a study by The New York Times that found multiple cases of Wall Street firms repeatedly violating the same regulations to argue that the SEC’s enforcement approach fails to discourage future wrongdoing. “The reason it fails as a deterrent is the same companies keep doing the same thing over and over even after they enter into these agreements. They not only don’t admit and don’t deny, they don’t change.”

The SEC has also come under fire for not providing enough information to the public when the agency brings an enforcement action. In a February report, POGO called for more transparency across the board in SEC enforcement cases.

“[F]ederal judges should require the agency to lay out all the facts and evidence—not just a negotiated set of narrow or vague disclosures—so the public can evaluate at least three key points: the conduct of the accused, whether the punishment fits the offense, and whether the responsible parties have been charged,” POGO wrote. “More disclosure would also help the public and Congress hold regulators accountable, and help defrauded investors and other injured parties seek damages through private lawsuits.”

We hope future cases will send a clear and coherent message about the SEC’s new enforcement policy, and will provide meaningful transparency to harmed investors and other members of the public who are still reeling from the 2008 crisis.