In May, the Wall Street Journal ran an opinion piece by King & Spalding partner Russell Ryan titled Why the SEC Needs ‘No‑Admit’ Settlements.
In June, the Journal ran an article by Ryan titled Mum’s the Word About SEC Defeats.
And in July, the Journal ran an article by Ryan titled The SEC’s Low Burden of Proof.
Is Ryan becoming a monthly columnist for the Journal?
“They haven’t asked me to do that,” Ryan told Corporate Crime Reporter in an interview last week.
“They have also rejected some of my ideas.”
What about an article for August for the Journal?
“Nothing is in the pipeline,” Ryan says.
Ryan is a high profile defender of the SEC’s neither admit nor deny policy.
“No admit settlements are essential if the SEC wants to file and resolve the numbers of cases it has gotten accustomed to filing and resolving over the past decade or so,” Ryan said.
“It’s important for most defendants not to have to confess wrongdoing for any number of reasons.
One of the most obvious reasons is that an admission of wrongdoing can often be used against the defendant in other litigation ‑‑ both private shareholder litigation and potentially even criminal cases. So, defendants are understandably reluctant to admit to wrongdoing.”
“There are a number of other unintended negative consequences that may well flow from any change in that policy.”
And policy change is in the works.
“A while back, there was a relatively minor change, but one that was not too objectionable. If there is a parallel criminal case in which the defendant was convicted of a crime, they would be required to admit the same facts in the SEC case,” Ryan explains. “Prior to that change, even where there was a parallel criminal case, the SEC defendant didn’t have to admit wrongdoing.”
Are you good with that policy change?
“I don’t think it is all that objectionable. I don’t think it accomplishes much, but at the same time, I’m not sure it’s particularly objectionable.”
Should the same policy hold if there is a deferred or non prosecution agreement in a parallel case?
“If you are admitting to facts in a criminal case in some formal manner that would be useable against you in another proceeding anyway, the fact that the SEC expects you to admit the same facts is generally not objectionable.”
What is the SEC’s position where the admissions were contained in DPAs and NPAs?
“I’m not sure how the SEC deals with prior admissions in DPAs and NPAs. But I would assume that if there was an admission in a criminal case, the SEC would expect an admission in its own case.”
“But I don’t know that is in fact the case.”
Then there was another reported change more recently.
“As far as I know, there has been no official statement by the SEC,” Ryan says. “The Enforcement Manual online doesn’t say anything about it.”
“According to media reports, the Chairman made some unofficial remarks about a policy change. And reportedly there has also been an internal memo circulated within the Enforcement Division that suggests that there is going to be a tightening of this policy and that apparently in some cases the SEC may begin to require admissions of wrongdoing.”
“According to media reports, one of the factors will be particularly egregious frauds. Another factor that has been mentioned is if there is a broad range of victims or something like that. But oddly enough, there has not been any formal or official statement put out that defendants and their lawyers can consult and prepare for the change.”
Ryan argues that if the SEC insists on admissions, it might move the action to the administrative arena.
“Most of the angst over no admit no deny settlements resulted from the reaction of a few federal judges over the past few years who have been somewhat critical of the agency,” Ryan says. “And Judge Rakoff has probably been the most prominent among them.”
“Clearly, if the SEC settles the case as an administrative proceeding that takes the judicial branch out of the process entirely and removes any concern that a federal judge is going to question the settlement or reject it because there is no admission of wrongdoing.”
“My point was more that if federal courts started requiring admissions then it would inevitably motivate both the SEC and the settling defendants to think long and hard about settling the case as an administrative proceeding instead of filing the case in federal court and running the risk of a federal judge either questioning or rejecting the settlement because there was no admission.”
Do we know what it would cost publically held companies to admit wrongdoing in these cases?
“I’m not aware of any numbers,” Ryan says. “There is probably a universe of cases where the price to be paid for an admission is relatively low ‑‑ either because it is not a fraud case or because there is no private right of action. There is probably that universe of cases where the cost is not extremely high.”
“But if you take an accounting fraud case, where there is likely to be parallel shareholder litigation and the possibility of criminal charges ‑‑ the price of an admission in that case might be much higher. It may be so high that a company would be willing to risk the result of litigation to avoid it.”
At the Corporate Crime Reporter conference, someone raised the issue of whether neither admit nor deny precludes a company from denying in a courtroom setting.
“They were probably referring to the fact that under the standard SEC settlement, there is a specific provision that says if you are called to testify in a courtroom, you must tell the truth,” Ryan said. “And if that means you deny it, we are not going to try to interfere with your obligation to tell the truth. It’s an acknowledgment that a settlement does not trump a testimonial obligation in a subsequent proceeding.”
Ryan also argues that the SEC should be required to meet a higher burden of proof.
“The general consensus view is that the SEC, in its civil cases, is governed by the preponderance of the evidence standard and is not held to the standard a criminal prosecutor must meet, which of course is beyond reasonable doubt, or even to the intermediate standard of clear and convincing evidence, which at least historically has been applied in many fraud based civil claims,” he says.
These are civil cases, so you wouldn’t expect a criminal burden of proof.
“I wouldn’t expect it, although I think it is something that should be thought about and debated a lot more than it has been as Congress has increasingly provided the SEC with what are becoming quasi‑criminal punitive remedies,” Ryan says. “They are explicitly punitive. This is after all a government agency charging an individual or a business with a violation and seeking in many cases some form of monetary financial penalty ‑‑ and that’s effectively the equivalent of a criminal fine.”
Why isn’t it simply a civil fine?
“It is technically a civil fine, because that is how Congress has defined it. The Supreme Court has given some guidance ‑‑ generally speaking, what the legislature says it is governs.”
“But I don’t think Congress could, for example, say the SEC could seek a civil incarceration. I don’t think anyone would take that seriously. To the extent that Congress keeps piling on higher and higher civil fines, they begin to take on the look and feel of criminal fines, notwithstanding what you call them nominally.”
“If it looks like a duck and quacks like a duck, we ought to be treating it like a duck.”
“There is at least a reasonable argument that in certain cases, the SEC should have to prove the case beyond a reasonable doubt. But at a minimum, if the SEC is charging someone with wrongdoing, particularly a fraud based wrongdoing, and if the SEC is seeking to punish that person, as opposed to merely getting an injunction or some other form of equitable or remedial relief, there is a strong argument that the SEC should be required to prove its case at least with clear and convincing evidence.”
Are you saying that any civil fine is punitive?
“It’s presumptively punitive, although back a few decades ago, there would be fines of $10,000, and you could argue that that is the securities law equivalent of a speeding ticket. But when you are talking about “civil” fines in the hundreds of thousands of dollars against individuals or the tens of millions against companies, that is punishment pure and simple. Nobody suggests that it’s anything other than a punitive remedy.”
“And when the government is seeking a punitive remedy, particularly based on allegations of fraud or similar wrongdoing, the government should have a higher burden of proof than a private litigant.”
[For the complete transcript of the Interview with Russell Ryan see 27 Corporate Crime Reporter 30(12), July 29, 2013, print edition only.]