| WASHINGTON, June 19
WASHINGTON, June 19 The decision by the U.S.
Securities and Exchange Commission to seek admissions of
wrongdoing in select enforcement cases is expected to put
pressure on other federal financial regulators to get tougher
with their own Wall Street settlements.
The shift in the SEC's settlement policy, announced late
Tuesday by SEC Chair Mary Jo White, breaks from the standard
practice of letting defendants settle without admitting or
White said the old policy will still apply in the majority
of cases, an acknowledgment that it has been effective at
avoiding costly courtroom battles and securing settlements that
return money to harmed investors more quickly.
Nevertheless, the move is winning praise from consumer
advocates and White's predecessor at the SEC, Mary Schapiro, who
on Wednesday told Reuters it is "a great step" that adds
firepower to the SEC's enforcement program.
Like the SEC, the Commodity Futures Trading Commission and
Federal Deposit Insurance Corp, for instance, regularly let
defendants settle without admitting or denying charges.
Other agencies, including the U.S. Department of Justice's
civil division, are even more lenient than the SEC and permit
defendants to deny allegations in some settlements.
Defense lawyers are watching to see how the SEC applies its
new policy, and whether other regulators will follow.
"In the financial services arena, the SEC is often the pace
setter for other regulators," said Stephen Crimmins, a former
SEC enforcement attorney who is now a partner with K&L Gates.
"If the public sees the SEC succeeding with this new
initiative, it's likely that other agencies will feel pressure
to follow suit."
The CFTC and the FDIC declined comment.
The SEC's traditional settlement practice became a lightning
rod for controversy after the 2007-2009 financial crisis.
U.S. District Judge Jed Rakoff in Manhattan has been
credited with highlighting the issue after he denied some SEC
settlements with big banks on the grounds they were too weak.
The federal appeals court in New York is considering an
appeal by the SEC and Citigroup of Rakoff's November 2011
ruling striking down the bank's $285 million settlement of
charges it misled investors about a collateralized debt
obligation. Rakoff said he could not tell if the settlement was
fair because Citigroup was not required to address the charges.
In recent months, consumer advocates and some lawmakers such
as Democratic Senator Elizabeth Warren of Massachusetts have
also questioned the track record of regulators other than the
SEC, and demanded to know more about how they hold banks
accountable and why more cases have not gone to court.
On Wednesday, Warren praised the SEC's policy change but
said she was still worried about other regulators.
"I remain very concerned that banking regulators have been
losing leverage in their enforcement programs by rushing to
settle and too rarely pressing forward with a more aggressive
litigation strategy," she said in a statement to Reuters.
"We need to make sure that large financial institutions are
held accountable when they break the law and that the penalties
are tough enough to deter future violations."
Officials from the Office of the Comptroller of the
Currency, which regulates big U.S. banks, have told lawmakers
that requiring an admission of guilt would delay enforcement
Travis Nelson, a former OCC enforcement official who is now
with the law firm Reed Smith, said he is skeptical the OCC will
change its approach. "The SEC must have a broader appetite for
litigation than the OCC," Nelson said.
The OCC declined comment.
Former officials said they expect regulators to observe how
the SEC's new policy works in practice before deciding whether
to follow the SEC's lead, especially because of its potential
They said the policy could create disincentives for
defendants to agree to settlements because admissions of
wrongdoing could open the door to private litigation. It could
also potentially encourage federal criminal charges by the
Justice Department or litigation from state attorneys general
who may piggyback on the SEC's case.
"I think it is a huge change in policy," said William
McLucas, a former SEC enforcement director who is now a partner
at WilmerHale and chairs the firm's securities department.
"I think it is going to have a significant impact on the
process, and I think it will be challenging to predict what the
scope of that impact will be."
The criteria that White laid out for how the SEC will select
cases are also murky, lawyers said.
In a memo to staff, top SEC enforcement officials said the
kinds of cases in which the SEC might seek admissions would have
to contain egregious intentional misconduct, cause widespread
harm to investors, or involve efforts to obstruct an SEC
But those standards could arguably capture many fraud cases,
potentially forcing the SEC to direct resources to defend them
in court instead of focusing on new cases.
"This will strain an already underfunded agency to devote
its scarce resources to trials, rather than investigations,
potentially resulting in fewer enforcement actions being
brought," said Toby Galloway, a former SEC trial attorney who
recently became a partner at Kelly Hart & Hallman LLP.
Because of that concern, lawyers say they suspect White and
the enforcement division will stick with the plan to apply the
new policy narrowly.
"It may be only three or four cases a year, but that may be
a good message for the SEC to send," said Solomon Wisenberg, a
partner at Barnes & Thornburg LLP.