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UPDATE 2-U.S. SEC to seek admissions in some settlements -White
June 19, 2013 / 1:46 AM / 4 years ago

UPDATE 2-U.S. SEC to seek admissions in some settlements -White

* SEC will use no admit, no deny settlements in most cases

* White says SEC will only seek admission in selective cases

* SEC settlement policy has come under scrutiny by judges

* White acknowledges this may push more cases to trial

* SEC also mulling some structural changes in enforcement

By Sarah N. Lynch

WASHINGTON, June 18 (Reuters) - U.S. securities regulators will try to extract admissions of wrongdoing from defendants in some settlements, potentially resulting in more cases going to trial, Securities and Exchange Commission Chair Mary Jo White said Tuesday.

The announcement marks a departure from the typical practice at the SEC and many other civil federal regulatory agencies of allowing defendants to settle cases without admitting or denying the charges.

That practice has come under scrutiny following the financial crisis, leading some federal judges to challenge or strike down proposed settlements.

“We are going to in certain cases be seeking admissions going forward,” White said at the annual “CFO Network” event hosted in Washington by the Wall Street Journal.

“Public accountability in particular kinds of cases can be quite important and if we don’t get them, then we litigate them.”

This marks White’s first big enforcement policy change since she took over the helm of the SEC in April.

The commission is also considering significant structural changes to its enforcement division to bolster its ability to try and win cases, people familiar with the division’s thinking said, after a mixed record in some recent financial crisis-related trials.

The enforcement division’s two co-directors, George Canellos and Andrew Ceresney, are considering organizational changes to strengthen coordination between investigators and trial lawyers so they fare better if they go to trial, and to better deploy the division’s accountants as part of a renewed effort to combat fraud, according to several people familiar with the matter.

Observers have been eager to see how White shapes the agency’s enforcement division, especially given her background as a former U.S. Attorney in Manhattan who prosecuted mobsters and terrorists.

In her confirmation hearing, she pledged to lawmakers that she would be a tough enforcer of the federal securities laws.

The changes to the settlement policy, announced internally to staff in an email on Monday, come at a critical time for the SEC.

The agency is awaiting a decision from a New York appeals court after U.S. District Judge Jed Rakoff in Manhattan declined to approve its proposed $285 million settlement with Citigroup Inc over whether the bank misled investors during the financial crisis.


White told reporters on the sidelines of Tuesday’s event that people should not interpret the change as a criticism of the settlement policy and in fact a “majority” of cases will still likely be settled with defendants neither admitting nor denying any wrongdoing.

“This is not a criticism of the past practice and having ‘no admit, no deny’ settlement protocols in your arsenal as a civil enforcement agency (is) critically important to maintain,” she said.

She added that cases will need to meet certain criteria in order for the SEC to seek admissions. Those include cases where there was “widespread harm to investors” or “egregious intentional misconduct,” she said.

She described the change as “incremental” to the January 2012 announcement by former SEC Enforcement Director Robert Khuzami that the SEC would no longer allow defendants to neither admit nor deny the charges if they had already made admissions in parallel criminal cases.

Generally, SEC officials have staunchly defended the “neither admit, nor deny” policy.

White’s predecessor, Mary Schapiro, defended the earlier policy, saying that requiring admissions would discourage settlements, bottle up the courts with lawsuits, and cause delays in returning money to harmed investors.

Earlier this year, freshman Senate Democrat Elizabeth Warren of Massachusetts raised questions about that philosophy, and has been pressing the SEC for details on how it determines when to settle or take a defendant to trial.

Rakoff, who has been arguably the most vocal about the SEC’s settlement policy, declined to comment on the changes White announced.

The SEC enforcement division’s Canellos on Monday outlined some areas being explored to get investigators and trial lawyers working together more closely and effectively, according to several people familiar with remarks he made at a panel discussion in Washington.

Although the majority of the SEC’s cases are generally settled, the SEC has had mixed results when they have gone to trial in some financial crisis cases.

Last year, a jury rejected civil fraud charges against Reserve Primary Fund founder Bruce Bent, whose money market fund “broke the buck” during the financial crisis after its heavy exposure to Lehman Brothers prompted an investor sell-off. His son Bruce Bent II was also cleared of knowingly violating securities laws but was held liable on one count of negligence.

White gave no details about organizational changes when asked about the topic on Tuesday. But she said she wants to put a renewed focus on accounting fraud. “I think you’ll see more targeted resources in that area,” she said.

Officials are also considering creating an accounting task force, one person familiar with the matter said.

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