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No-Admit, No-Deny: SEC Policy Evolution, Not Revolution

Source: WSJLive 6/18/13
Interviewed earlier this week by WSJ Financial Editor Francisco Guerrera as part of the Wall Street Journal's CFO Network Conference,  SEC Chairman Mary Jo White gave indications of what a well-known legal blogger has termed "incremental" change in the SEC's "no-admit, no-deny" policy of accepting settlements in which the alleged perpetrator (corporate or individual) neither admits nor denies guilt (i.e. the civil charges against them).Read more in this post as to what appear to be the beginnings of criteria the SEC will apply in bringing "some" cases to trial, if necessary, to serve the public interest, vs. continuing to use the "no-admit, no-deny" policy as a "major tool in its arsenal" for the "majority" of its cases, as stated by White in her informal remarks on June 18. 

Here's the story.... of how the SEC Chairman began to have questions fired at her on this topic by some Members of Congress within a few short weeks of her being sworn into office, and how she seems to be leading a peaceful ('incremental, as's Broc Romanek has termed it)  'evolution' in thinking at the Commission in response to concerns voiced by those who are challenging the SEC's 'no-admit, no-deny' policy within Congress, rather than a wholesale overturning of longstanding policy which the SEC has historically argued is effective.

Captured by Kaptur at May 7 Budget Hearing

Although the no admit-no deny policy long predates Chairman White’s entering office this year, she faced challenges about the policy from Congresswoman Marcy Kaptur (D-OH) in a House Committee on Appropriations –(Financial Services and General Government Subcommittee) - Budget Hearing on the SEC (May 7, 2013).

As can be seen from the following Q&A during the May 7 hearing, Chairman White was very familiar with the SEC’s current Enforcement/settlement policy on no-admit no-deny, and added that she was studying the issue to come up with her own recommendations. Here is how the exchange went at the May 7 hearing:

Congresswoman Kaptur's Question:
[Regarding the] SEC’s settlement policies in which people neither have to admit or deny guilt - even when they may plead guilty in criminal cases - what if SEC had all the funding they needed?
SEC Chairman White’s Response:
The no admit-no deny settlement protocol has been used by a number of entities on the civil side, to very good end, to get many of the relief… to get the money to investors, very quickly.

The SEC has changed its policy; where there is a parallel criminal matter, the SEC generally will get those admissions as well.

Among the many things I am reviewing as SEC chair is that protocol.

The SEC’s settlements, whether administrative or judicial, [is to] lay out the facts.
I take your comment; and one of the things I am reviewing with [the] Enforcement [Division] is our policy.
Warned by Warren's May 14 Letter

Next up for the SEC Chairman was a Letter from Senator Elizabeth Warren (D-MA) to the Chairmen of the Federal Reserve Board, Department of Justice, and Securities & Exchange Commission. (Note: within this letter, the Senator refers to a Senate Banking Committee hearing which was convened on Feb. 14, 2013 on the subject of Wall Street Reform.

Witnesses testifying at the Valentine's Day hearing were from the federal banking agencies and White’s predecessor, then-SEC Chairman Elisse B. Walter. The focus of that hearing was not on no admit-no deny, but the subject came up in a line of questioning between Sen. Warren and the OCC, and Sen. Warren, through her May 14 letter, expanded the line of questioning to the FRB, DOJ and SEC.
In her May 14 letter to FRB's Bernanke, DOJ's Holder and SEC's White, Senator Warren asks each agency chairman to respond as applicable to their respective agency:  
Have you conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilt and going forward with litigation as necessary to obtain such admission and, if so, can you provide that analysis to my office?
I am interested in learning more about how your institution has evaluated the cost to the public of settling cases without requiring an admission of guilt rather than pursuing more aggressive actions.

The SEC Chairman’s June 10 letter sent in response to Senator Warren
 (according to a copy I have seen)  included the following points, among others (reformatted to bullets):
  • The Commission is rigorous and methodical in analyzing each offer to settle an enforcement action.
  • While we have not conducted a macro analysis of the trade-offs to the public between settling an enforcement action without an admission of guilt or wrongdoing and going forward with litigation, every settlement offer is analyzed on a case-by-case basis in light of the unique facts and circumstances of that specific case.
  • In each case, the Division of Enforcement and Commission analyze whether a proposed settlement advances the public interest by obtaining the relief that we could reasonably expect to receive at trial, without assuming the risks and costs of lengthy and protracted litigation….
  •  …There is, in fact, economic research that indicates that SEC settlements have consequences for firms as well as management and directors. [footnote 1
    • Footnote 1 in the letter references a study by “a group of economists” who “found that the reputational penalties to a firm of an SEC enforcement action for financial fraud are highly significant: for each dollar that a firm misleadingly inflates its market value, on average, it loses both this dollar plus an additional $3.08 when its misconduct is revealed (Jonathan M. Karpoff, D. Scott Lee and Gerald S. Martin, The Cost to Firms of Cooking the Books, 43 Journal of financial and Quantitative Analysis, 2008)….
    • The same economists… found that 93% of the individuals [studied] lose their jobs by the end of the regulatory enforcement period, with the majority being explicitly fired….(Karpoff, Lee & Martin, The Consequences to Managers for Financial Misrepresentation, 88 Journal of financial Economics, 2008).
    • In addition, economists have found that when the SEC settles a case, outside directors experience a decline in the number of other board positions held…(Eliezer Fich, & Anil Shivdasani, Helland, Reputational Penalties and the Merits of Class-Action Securities Litigation, 49 Journal of Law and Economics, 2006).
  • Generally, the reality is, as trial-ready as we may be, Wall Street financial institutions and other large public companies often weigh the risks of litigating to trial against the SEC – including the risk of loss, litigation costs, reputational damage and other factors – and choose instead to offer proposed settlements.
  • On the other hand, individuals may weigh the risks of litigating against the SEC differently than do large institutions, particularly given that our settlements often include remedies such as bars that restrict an individual’s ability to earn a living in the financial industry.
  • In fact, most of our financial crisis-related actions against individuals have been filed as litigated actions without simultaneous settlement actions.
  • Specifically, 70% of the 105 financial crisis-related actions that we filed against individuals-including against CEOs, CFOs, and other senior executives from major banks and financial institutions … were filed as litigated actions.
[NOTE: The SEC recently updated its Spotlight page on SEC Enforcement Actions Addressing Misconduct that Led to or Arose From the Financial Crisis, with updated stats as of June 15, 2013.]

Evolution, Not Revolution: 
White Says There Will be “Some” Change in “No-Admit No-Deny” Policy- Lays Out Potential Criteria; “No-Admit No-Deny” Will Still be “Major Tool in Arsenal” in “Majority” of Cases

Moving relatively quickly forward (in terms of federal agency policy movement, even in terms of thinking or simply communicating that thinking), between the Chairman’s June 10 response to Senator Warren and the Chairman’s June 18 appearance at the Wall Street Journal’s CFO Network event, the SEC Chairman stated there will be “some” change in the agencies ‘no-admit no-deny’ policy – and enumerated what appeared to be some potential criteria for when the agency would move to litigate (if necessary) vs. settle under a no-admit, no-deny scenario.  Watch SEC Chairman Mary Jo White’s response on June 18 (via WSJ live) at the top of this post.
Since this has been a highly talked about topic, and the most recent views of the SEC Chairman have not yet been encapsulated in a formal speech, but largely in off-the-record comments at the WSJ CFO Forum as covered by various news sources and bloggers and in subsequent interviews with the NYT and others as very well documented by’s  Broc Romanek as cited further below, I have summarized the key points made by the SEC Chairman, shown in the video clip at the top of this blog, in bullet form below.
SEC Chairman Mary Jo White, at WSJ CFO Network Forum June 18, 2013 re: No-Admit, No-Deny:
We are talking about settlement practices, and obviously the SEC is a civil law enforcement agency.

 I think the SEC and frankly many civil enforcement agencies have made very, very good use of the no admit-no deny settlement model:
·         you can settle quicker,  
·         you have no litigation risk – in terms of investors who get money out quicker,
·         so I think that’s always going to be a major, major tool in the arsenal.

I have reviewed the policy and the practice
; it’s something I dealt with to some extent on a different plane as U.S. Attorney.

And we are going to, in certain cases, be seeking admissions going forward. 
·         I think accountability, public accountability,
·         in particular kinds of cases, can be quite important,
·         and if you don’t get them, you litigate them

What kinds of cases are those? To some degree, I think it can turn on:
1.       How much harm has been done to investors
2.       How egregious is the fraud

And so,
·         I think you’ll see going forward, some change in that space,
·         But I emphasize, again, how important the no admit-no deny protocol also will remain for the majority of cases.
Broc Romanek of Blog has linked to numerous reports of the SEC Chairman’s remarks a couple of times over the past week, and termed the aggregate reports as alluding to an “incremental” shift in policy on ‘no-admit, no-deny.’  See Broc’s recent blog posts, SEC to Incrementally Limit Ability to Settle Without Guilt Admission (June 20, 2013) and More on SEC Chair White’s Decision to Require Some Defendants to Admit Misconduct (June 27, 2013).

My two cents (please see the disclaimer on the right side of this blog): All in all, White really seems to have hit the ground running, in responding to the challenges she's been given on the SEC's policy of "no-admit, no-deny" as detailed above, and keeping in mind this is just one of many, many challenges an SEC Chairman faces. And, assuming she brought the Commission, Enforcement and other key Division Directors together over even an "incremental" movement in a key policy is quite an accomplishment in such a short period of time, especially measured in federal government procedural time-- and I mean that as a compliment, given the best federal and other agencies exhibit substantive and exhaustive due process. It will be interesting to see how the stakeholder community reacts (preparers, auditors, directors, investors, attorneys) as well as Members of Congress, to the concept that White has floated. 
Posted: 6/30/2013 3:22:29 PM by Edith Orenstein | with 0 comments
Filed under: no admit no deny,Rep. Marcy Kaptur,SEC Chairman,Sen. Elizabeth Warren,Mary Jo White

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