At the Corporate Crime Reporter conference last month, Andrew Ceresney, the Securities and Exchange Commission’s (SEC) new co-director of enforcement, put up a spirited defense of the agency’s neither admit nor deny settlement policy.
But during the question period, Ceresney also admitted that defendants who have entered neither admit nor deny settlements can readily deny the allegations in certain venues.
And Ceresney said that the SEC Enforcement Division will be taking a look at modifying its neither admit nor deny settlement policy in coming months.
Ceresney appeared on a panel moderated by Thomas Hanusik, a partner at Crowell & Moring in Washington, D.C.
Appearing on the panel with Ceresney and Hanusik were Mei Lin Kwan-Gett, a partner at Willkie Farr in New York, Russell Ryan a partner at King & Spalding in Washington, D.C., and Robert Weissman, the president of Public Citizen in Washington, D.C.
Ceresney opened the panel by warning the audience that he had been on his new job only five days — having jumped from Debevoise in New York to join his former law partner Mary Jo White at the SEC in Washington.
“As a defense lawyer, I always clearly wanted from my clients no admit and no deny settlements,” Ceresney said. “When I was a defense lawyer that was important for my clients from the perspective of collateral estoppel of admissions and also reputationally.”
“But from the SEC’s perspective, there is no question that the SEC number one needs discretion to do no admit no deny settlements, and two, should legally have that discretion.”
“Our general approach to settlements is to settle a case only when in our informed judgment the settlement is within a range that we could reasonably expect if we litigate through trial.”
“And no admit no deny is important to allow us to get settlements in certain cases, such as when there are immense collateral consequences for civil cases and the defense is reluctant to admit and where the evidence may not be as strong as in other cases.”
“And not having that option would have a number of consequences for the SEC,” Ceresney said. “It would number one impair our ability to get quick relief to investors through a quick settlement.”
“It would have the impact of draining resources from the SEC. One thing I’ve noticed in my short time is that we do have limited resources. We do our best with what we have. But our resources are limited and we have to focus them in the smartest way. And this allows us to do that so that in the right case, we can get a settlement.”
“And third, litigation risk. Obviously not every case has the same level of evidence. And there are cases where you are taking on litigation risk.”
“If we can get a settlement that is within the range of outcomes that we otherwise wouldn’t be able to get in the litigated context, all of those dictate that we should.”
“We also have a provision in our settlements that defense counsel may not deny the facts alleged by the SEC in the action or suggest that the allegations are without merit.”
“And that effectively means that the defendant is locked into the version of events that we have alleged.”
“It does ties their hands significantly.”
But during the question and answer period of the panel, Ceresney was asked by Shirah Neiman whether in fact the defendant can deny in certain contexts.
“Can’t you go from Judge (Jed) Rakoff’s courtroom, where a settlement has been approved, across the hallway to Judge (Loretta) Preska’s courtroom — and the attorney for the company in that proceeding can walk in and deny the facts alleged in the civil complaint that were alleged in the SEC complaint? Doesn’t he have the right to do that — maybe not to the press, or to individuals, but in court, in the other class actions — to deny the facts?”
Yes they may deny the facts, Ceresney said, despite the no admit no deny settlement.
“Under the current structure, that is a right that they have, yes,” Ceresney said. “The provision that we have says that in the context of the SEC settlement, they can’t suggest that there is no factual basis to the settlement. But it does allow them to take a different position in other proceedings.”
Hanusik added that “under the current policy, it’s not just lawyers in a courtroom across the hall in a parallel civil case” that can deny.
“It’s actually individuals who are testifying under oath and there are a number of different circumstances,” Hanusik said.
But Ceresney kept cycling back to the SEC’s position that “the no admit nor deny settlements do achieve our goals.”
“They bring accountability,” he said. “Sanctions are imposed. The facts are aired in detail in our orders. The defendant doesn’t have any ability to deny those facts. We have accountability. We have deterrence. Our sanctions are significant. And quick justice is better than delayed justice in terms of deterrence. No question about that.”
“Investor protection — we get investors relief quickly and significantly and we provide compensation to investors quickly.”
“From the SEC’s perspective, it’s important we have the ability in cases to make the decision to do a no admit no deny settlement.”
“From a legal perspective, we should also have that discretion. The review by the court is limited to determining whether the settlement is fair, reasonable and in the public interest. That is a very limited review. No admit no deny does not impact the ability of the courts to evaluate those settlements.”
“We have a newish policy under which when a party has admitted to conduct in connection a criminal or other regulatory proceeding, we will delete the no admit no deny language from the settlement documents, we will recite the facts and nature of the criminal conviction, or if it is a non pros or a deferred pros, we will recite those facts in the settlement documents.”
“And then the staff has discretion whether to incorporate the facts admitted during the plea allocution into the settlement.”
“This is a change from our prior policy. But it makes good sense and it was a good change.”
“We obviously have a new chairman, Mary Jo White, and we in the Enforcement Division will be discussing with her what we should be doing going forward on this issue.”
Weissman said that the SEC’s no admit no deny policy “fails to meet deterrence objective” and “falls far too short on the investor protection objective.”
“The reason it fails as a deterrent is the same companies keep doing the same thing over and over even after they enter into these agreements,” Weissman said. “They not only don’t admit and don’t deny, they don’t change.”
“The New York Times after the Rakoff decision in the Citigroup case did a review found 51 instances in the past affecting 19 firms in the past 15 years of repeat violators. Citigroup is probably example number one. They were a five time recidivist.”
“One has to wonder about the effectiveness of this approach. It does not seem to deter firms from again engaging in the same or similar kinds of conduct.”
Ryan said he was “genuinely puzzled why people are making a big deal about” no admit no deny settlements.
“It has been going on for decades, not just at the SEC but at many other federal agencies,” Ryan said.
Ryan also challenged federal judges who would force corporations to admit in SEC proceedings.
“I view it as the judge in the SEC case putting his thumb on the scale and essentially presuming guilt and liability in the shareholder suit and basically sticking his thumb on the scale and giving the plaintiffs in the separate case an advantage that they are not entitled to,” Ryan said.
“Why shouldn’t they have to prove their own case, if the SEC has not yet proven its own?”
As for Citigroup being a recidivist five times in SEC proceedings, Ryan said — “that’s not remarkable that you would have a firm that size in this business that has tripped over the law five times.”
Hanusik sided with Ryan on this point.
“Citigroup probably has over 120,000 employees,” Hanusik said. “There is a big difference between individual recidivism and corporate recidivism. When you take an individual and make them admit liability, presumably that is going to have an impact. They have to stand up raise their hand before a judge, and presumably that has an impact that is indelible and that is with them forever. It doesn’t live with all of them forever because there are recidivist individuals out there.”
“On the other hand, this could be pretty far flung when it is a corporation,” Hanusik said to Weissman. “You have violations that might have been occurring in 1991 by somebody who retired or was retired for the violation in 1992. And under the same corporate umbrella, you have violations by completely different people. There are percentages of people who will engage in this type of behavior. So, is it really fair to compare the recidivism rates?”
“Yes, it is,” Weissman said. “We are not talking about embezzlement. We are not talking about the Foreign Corrupt Practices Act (FCPA) cases where I think you could make that case. If you look a the Citigroup case, it was a big deal. It wasn’t like some tiny little thing that was going on.”
“Why are people making a big deal about it? Underlying Judge Rakoff’s decision was a scream of frustration and outrage. You had the worst economic crisis brought on by massive fraudulent activity. And basically no criminal prosecution, no accountability, no civil prosecution. The cases that are brought involved small fines and effectively meaningless injunctive relief.”
“That’s why people are worked up about it. It’s not primarily about no admit no deny. It’s that there is no accountability whatsoever for the worst crisis in 70 years. That’s why people are upset. And when you say — it’s only five times, like it’s a parking ticket — these are not parking ticket violations.”
“So, yes, the recidivism is corporate. These are corporate violations. These are big things. The whole idea — if the corporation can’t control itself, then it’s too big. If it is too big and it can’t control what is going on, then it should break up so that it can be properly controlled.”
“If they get all the benefits of being a global corporation — like they get to book profits from a subsidiary over here and a subsidiary over there, then they have to take responsibility as well for the wrong that is done for all of them. And these are not parking tickets. The reason people are upset is exactly that response — only five times in the last five or ten years? Oh my gosh — five times in the last five or ten years, breaking the law. That’s a bad thing.”
Hanusik asked Kwan-Gett whether the SEC be moving to hold these firms in contempt when they are repeat violators.
“I don’t think so,” Kwan-Gett said.
“Some of the cases are big cases. Some of them are huge financial crisis cases. Some of them concern conduct that we all agree was horrible and should not have occurred. But if you look at the book of securities laws, it is a really thick book and not all of the laws in there need a finding of scienter to find a violation. For the fraud provisions, yes it is terrible if you are are a recidivist, if you keep breaking the anti-fraud provisions of the securities laws.”
“But the books and records provisions are a completely different story. If you have the wrong accounting backup for accounts receivable in the first quarter of 2013, you have violated the securities laws. So, we have to keep in perspective what it means for someone to be a repeat violator of the securities laws because not all securities laws violations are created equal.”
Ceresney said that “there is no question that the same companies engaging in additional conduct over time, multiple times, is a problem — it’s one that needs focus and attention.”
“But I don’t think admission would increase deterrence in that respect,” Ceresney said. “Our settlements have significant penalties and significant components of it — the Citi settlement was a significant settlement. Those have deterrent value separate and apart from an admission that is significant.”
“On the investor protection point, no question that in the appropriate case, the SEC would like for investors to recover,” he said. “But the SEC has a different mission. It’s mission is to bring enforcement actions for violations of the securities laws. We do not have the power to obtain restitution for investors. Our financial remedies are limited to disgorgement and penalties. We have a different mission than the civil litigation. That doesn’t mean that we don’t have an interest in investors recovering in appropriate cases. But it does mean that our mission is different. And we have to conceptualize our role differently.”
Weissman said there was “no instance in the last ten years where the SEC went back and said — yes, you are in contempt.”
“I’m not a huge fan of the remedies on the deferred prosecution side either, but they are much more meaningful and much more far reaching,” Weissman said. “And I don’t think there is evidence that the SEC injunctive relief has done very much to move toward compliance, to move toward preventing repeat violations.”
Ceresney said that “there is a misconception on when we can get contempt relief for an injunctive violation.”
“In a civil contempt context you can only get contempt relief when there is ongoing conduct and you can show that there is ongoing conduct,” Ceresney said. “In cases in which there is even a repeat violation, you typically can’t show — you might be able to — but in most cases you can’t show that there is ongoing conduct. Therefore civil contempt is not available. And that’s why you don’t see that very often. And typically in those cases you can bring a new violation. And that is typically what happens. You don’t spend your time on the civil contempt — which you can’t get. But you do bring a new violation.”
“The question has been raised over time — why are you getting an injunction if you can’t necessarily enforce it down the road? There are reasons in particular cases why you would. We are doing more thinking about this issue and being more creative about injunctive relief to try and tailor it in a way that makes it more meaningful. And I think you’ll see that in the coming months.”
“We are also going to and have to taken into account the past conduct in considering what the appropriate penalty is for future conduct.”
Hanusik asked Ceresney — what’s the point of getting injunctive relief if there is no contempt violation that you can bring as a follow on to enforce it?
“There are times when you can — I shouldn’t say no cases,” Ceresney said. “Over time, it has been a remedy that signals the seriousness of the conduct and provides for — if in the future there is ongoing conduct — we can get it.”
“There are reasons to still get injunctive relief. But there are also reasons to think about whether there are more effective ways to use injunctive relief, to tailor it so that it is more meaningful and so that it means something more than just an obey the law injunction,which is — you shouldn’t violate the law.”
Ryan said — “we have to think about unintended consequences anytime you make changes a public policy.”
“You can expect that if judges start mandating admissions, you are going to get fewer settlements, but you are also going to incentivize the SEC and the settling party to gravitate toward settlements that do not involve a federal court at all,” Ryan said. “Logic tells you that people respond to the risks involved. You will inevitably see settlements gravitating out of the federal courts and into the types of non prosecution agreements we saw with Ralph Lauren.”
“And be careful what you wish for. I’m not saying that’s a bad thing that they gravitate. But for people who want more accountability and transparency, I would contend that there is a much greater ability to be slightly less transparent and less accountable if there is not a federal judge involved at all.”
“The more we push for required admissions, the more we push the settling parties toward venues that are at least slightly less transparent and slightly less accountable.”
“And another unintended consequence that is virtually inevitable — if you view an SEC settlement as an arms length negotiation where each side digs in, pushes hard and tries to get the very best result for their side or their client, but now you have a separate party, a federal judge, coming in and saying — this one term, this no admit, no deny provision, that’s off the table, you can’t negotiate that one anymore — that one is a win for the SEC in every case.”
“Inevitably, the SEC in the aggregate has got to give up something else in return. You are not going to get something for nothing. Probably the least transparent and most likely result is that the SEC will give in a little bit more on the penalties it otherwise would have gotten. As a result, you will get lower penalties, or some other form of relief will be diminished in order to compensate for the fact that people would now have to admit to their violations. And that doesn’t even count the cases that, as a result of this requirement, are not going to settle at all. They will just progress for five years in the courts. And undoubtedly, some them the SEC will not win or it wouldn’t get it what it would have gotten in settlement five years earlier.”
Weissman said “there is a presumption now — a default rule — a presumption that you are going to get the no admit no deny.”
“If the default rule were to change, maybe it wouldn’t so fundamentally restructure the rest of what is being negotiated.”
During the question period, Bloomberg columnist Jonathan Weil asked — “Is it not up to the judge to determine whether or not to issue an injunction?”
“I’ve never understood the notion that the SEC has that the judge should defer to the agency and then issue the injunction because the SEC asked for it,” Weil said. “It’s the judge’s call whether to issue the injunction in the interest of justice. That’s why he’s there right? To decide whether an injunction is appropriate. It’s his injunction, not yours.”
“I don’t think that’s the law,” Ceresney answered. “I think the law is that the judge is reviewing the settlement to determine what is fair, reasonable, adequate and in the public interest. That is a very deferential standard of review. The judge has to give discretion to the SEC to determine the appropriate balance. The law has signaled that in fact it is not the judge’s full discretion to decide.”
“But it’s his injunction, the court’s injunction, right?” Weil asked.
“Ultimately, the injunction is being issued by the court,” Ceresney said. “But there is a standard for what the judge can review to determine whether it is appropriate.”
“On the basic issue on whose injunction is it — it is the court’s injunction,” Ryan said. “But it is not just the court’s injunction. It’s the court’s judgment entirely. If we are going to start picking away at that one aspect of the settlements that get submitted to the court for its signature, I think we should welcome scrutiny of some of the other aspects that are in a typical SEC settlement. They are basically the same in every case. There are any number of provisions that raise serious public policy concerns but don’t appear to get any scrutiny at all.”
“You can’t tell from reading a typical obey the law injunction that you have to be caught in the act for it to be enforced,” Weil said. “It just says you are not allowed to violate this section again.”
“I’m going to defer to Andrew on that,” Ryan said. “I honestly had not heard that explanation before as to why the SEC does not seek contempt. I thought it was more because courts generally require that second instance of misconduct had to be sufficiently similar to the first one. You can violate section 10(b)5 in any number of ways — insider trading, accounting fraud, Ponzi schemes — what have you.”
“When I was at the SEC, nobody had any confidence that a judge would hold somebody in contempt because they had a 10 (b)5 injunction for insider trading five years ago and now they were involved with an accounting fraud that had nothing to do with insider trading.”
“I have been at it for five days,” Ceresney said. “The SEC has the discretion to decide whether a particular case it justifies a no admit no deny settlement or not. I’m not saying today that there won’t be a circumstance like our new policy where you have a criminal admission, or you have an admission in a deferred prosecution, that you should have admissions in the SEC settlement. What I am saying though is the SEC is the one who should make that judgment.”