David Zaring is assistant professor of legal studies at the Wharton School of Business at the University of Pennsylvania.
The Securities and Exchange Commission recently qualified its longstanding policy that allowed companies to “neither admit nor deny” their guilt when settling cases.
The policy tinkering has come in the wake of criticism by lawyers, academics and, most memorably, Judge Jed S. Rakoff of the United States District Court in Manhattan. These critics have argued that the public interest is not served when the agency settles cases and imposes sanctions without explaining to the public the basis for the penalty.
It now appears that the agency agrees – sort of. “There may be certain cases,” it has concluded, “where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution.”
I am not sure that the critics are right to insist on these sorts of public admissions, and I am glad that the S.E.C. is hedging its bets by limiting the change to “certain cases,” and not every case.
Private parties – be they corporate boards, drug manufacturers or divorcing spouses – never have to explain publicly the reasons they are settling civil cases. It is not clear that the government should be treated differently. Is the public interest in securities fraud cases greater than the public interest in other civil cases, which can affect jobs, the public health and the best interests of children?
I once represented the government as a defense lawyer, and the last thing I would want to do in a settlement negotiation would be to agree publicly that my employer had broken the law. It is much easier to let bygones be bygones, hold on to your private opinion of your client’s rectitude, and, when necessary, pay the other side money to make the case go away.
What is clear is that in securities fraud cases, requiring defendants to admit they committed fraud to settle cases will make it surpassingly easy for private parties to sue over the same conduct. That prospect will actually make the S.E.C.’s job more difficult because defendants will know that, by settling with the S.E.C. and acknowledging wrongdoing, they are opening themselves up to more litigation.
How did we get here? Judge Rakoff made his stand against “neither admit nor deny settlements” in the S.E.C.’s case against Citigroup, a bank that performed particularly badly during the financial crisis. He was apparently worried that the S.E.C., while making grand claims of serious wrongdoing in its complaint, was imposing a slap on the wrist and receiving a halfhearted promise from the bank to behave properly in the future.
The judge decided that he could not determine whether the settlement was fair (something particularly important for courts that will be charged with continuing involvement in the case if the defendant sins again) without “cold, hard, solid facts, established either by admissions or by trials.” He accordingly demanded that the S.E.C. and Citigroup provide him with those facts before he would settle the case.
The S.E.C. has appealed that order, and things look promising for the agency, but in the wake of his very public criticism, Judge Rakoff has won some adherents. As Judge Victor Marrero, who is overseeing the SAC Capital settlement, observed: “There is something counterintuitive and incongruous about [a company] settling for $600 million if it truly did nothing wrong.” Other judges have followed suit.
And now, with the latest memorandum, the agency itself appears to be swayed.
It apparently wishes to require an admission only in particularly important cases, but even for these, I am uncomfortable with the policy. Law enforcement agencies always take some defendants to trial and verdict; everyone wants a few trophies. But once an agency has won some cases, it is cost-effective to get other defendants to settle or face the consequences. Indeed, extracting settlements is one of the points of building a fearsome reputation through a few wins in court.
The new policy, however, will make pursuing the big fish draining. For the large cases, it will mean that there are only two possible outcomes: a civil trial with a verdict, or an admission of guilt by the defendant, which will lead to serious follow-on litigation.
It is particularly troubling given that the new S.E.C. chairwoman, Mary Jo White, has said she would like to prioritize securities fraud cases. Those cases are hard enough to win to begin with. They frequently involve large public companies that may balk rather than make an admission and face litigation from plaintiffs’ lawyers who did not discover and bring cases on their own before the S.E.C. action.
One can also assume that making the price of admissions high will make the price of fines correspondingly low.
Even for the most prominent cases, I would prefer to evaluate the agency on the size of the fines it wins and conditions it imposes. There will be plenty of corresponding news stories about the subject matter of the case, if it is important enough, and that gives us another yardstick with which to judge the agency as well. It may be a lot easier than requiring an “I did it” from the defendant in court.