As a young man, your heart is set on being a professional soccer player. You play Division I college soccer. And then you actually play two years professionally.
But alas, things don’t work out. And you end up going to Harvard Law School. And defending corporations and individuals in white collar cases. Jonathan Tuttle had such a ride. He’s currently a partner at Debevoise & Plimpton in Washington, D.C. And now, instead of kicking the soccer ball, he spends much of his time before the Securities and Exchange Commission (SEC).
We asked Tuttle about the recent criticism by Judge Jed Rakoff and others of the SEC’s neither admit nor deny settlement policy.
“In one sense, I can understand the frustration that not only Judge Rakoff but others in the press and elsewhere have described,” Tuttle told Corporate Crime Reporter in an interview last week. “How is it that the SEC gets these remedies, but the companies are not required to admit to the underlying conduct the way that they are for example in a deferred prosecution agreement, or other similar resolutions with the Justice Department?”
“But as a practical matter, you have to think about both the resources for the SEC and the level of risk faced by companies, but also individuals in trying to resolve things with the SEC. The reality is that most, if not all, cases settle. You can’t have settlements that exposed companies or individuals to substantial amounts of civil liability.”
“If you want to change neither admit nor deny, you have to do something about private damage actions. It will be nearly impossible for companies to reach significant settlements with the SEC on issues where they are forced to admit to the underlying conduct. At the end of the day, they not only have those cases, they are stuck admitting those facts for purposes of the follow on private damages actions.”
But most of those follow on actions are settled anyway, right? “They are,” Tuttle says. “But they all have the risk that it ends up going to a fact finder and they lose and get nothing or lose everything.”
But if the SEC changes its policy from neither admit nor deny to admit, you are still going to have these follow on civil actions. And you still are going to have settlements. What difference does it make?
“It makes a difference in the amount of the settlement,” Tuttle says. “What drives the amount of the settlement for companies and for the plaintiffs on the other side is the difficulty in being able to prove the allegations. If you take that uncertainty out of the mix because you have required a settlement with the SEC that now admits to a set of facts that gives rise to not only the SEC’s allegations, but also to the allegations of the civil plaintiffs, then you have removed the uncertainty of the civil plaintiffs, and they have absolutely no incentive to resolve the case short of whatever the maximum damages they would be able to obtain at trial.”
If the SEC says – we are getting rid of neither admit nor deny, your guess is that most companies would not settle those cases?
“They wouldn’t settle them the way they are settling them now,” Tuttle says. “In virtually every case, the SEC has a set of facts that they believe they can prove. You get to that point in the Wells process where the SEC says – I have this set of facts that I believe I can prove. The defense says – we don’t think you can prove that, or even if you could prove those facts, we don’t think they give rise to the violation that you are alleging.”
“Then you either direct that case toward a trial, or you try to reach some resolution on what the company and the SEC can agree on. You might change the nature of settlement and not the fact of settlement.”
“But the SEC will be faced with more difficult choices if they are not allowed to settle with the neither admit nor deny language. If they want the 10b fraud case, they are going to have to take those cases to trial. And those will be much more difficult, much more resource intensive and much more expensive for the SEC, because the companies have little incentive to settle on those types of cases.”
What impact if any has the criticism had on SEC settlement policy?
“On Foreign Corrupt Practices Act cases, they came out with a change so that where there are parallel Department of Justice resolutions, particularly deferred or non prosecution agreements, the SEC is now going to insist that people who are entering into those kinds of agreements, similarly admit the facts in the parallel SEC resolution,” Tuttle said. “That’s one area where they certainly have responded.”
As for the SEC new whistleblower office, Tuttle said that “they are receiving lots of whistleblower tips.”
“Interestingly, they reported earlier this year that something north of ten percent of those tips are coming from outside the United States,” he said. “I don’t believe that the SEC has paid any bounties as of yet. But I understand those are in process in some cases.
The bounty provision provides from anywhere between ten and thirty percent of any recovery the SEC gets in cases over one million dollars. It’s a relatively sizeable bounty.”
“On the SEC side, they are making use of the whistleblower tips that are coming in to launch investigations.”
“Most companies took whistleblower complaints seriously before. But now it is at a different level because you have whistleblowers who also are going to the SEC.”
[For the complete Interview Jonathan Tuttle see 26 Corporate Crime Reporter 26, July 2, 2012, print edition only.]