Urska Velikonja on SEC Enforcement

Remember Securities and Exchange Commission Chair Mary Jo White’s famous 2013 speech in which she promised to require more admissions from SEC defendants?

Urska Velikonja
Georgetown Law Center

White is now a partner at Debevoise in New York representing Wall Street banks and assorted major corporate criminals.

And White’s SEC admissions policy didn’t exactly make Wall Street quiver.

Urska Velikonja has been digging into the matter.

Velikonja is working on a law review article that will detail her findings.

Let’s just say that under SEC Chair White, very few large public companies were forced to admit wrongdoing.

And those who did only signed onto the mildest form of admission — that of negligence.

Few admitted to knowing violations — an admission that under Dodd Frank would have real consequences — like disqualification from the private placement markets.

“Up until the early 1970s, defendants could deny that they did anything wrong. In 1972, under the director of enforcement at the SEC Stanley Sporkin, the SEC adopted a rule that they would no longer allow defendants to deny,” Velikonja told Corporate Crime Reporter in an interview last week.

“That was the basis for these admit nor deny settlements.”

“That was the lay of the land from 1972 until Mary Jo White comes in and says — let’s do a little more.”

“Actually, before Mary Jo White there were some settlements that had something that smelled like admissions. Goldman Sachs agreed to some facts in the Abacus case. That was in 2010.”

“In 2013, Mary Jo White announces that the SEC is going to seek more admissions in SEC settlements. And you see starting right around the summer of 2015, there are some admissions. The last I checked was around January 2017. And by that point, the SEC had secured about 80 or so admissions.”

How many of those are major public companies? Stanley Sporkin, when he was head of SEC enforcement, would go after the big companies to send a message to the markets as a whole. He called it — chop at the top.

“The 80 cases includes everyone.”

What about large public companies?

“These were cases filed in 2012 to 2015. There are 55 cases in the first three years of Mary Jo White’s tenure. It’s a somewhat incomplete list. I don’t have the last year — it has another 25 cases or so.”

“I’ll give you a back of the envelope sense — of the 55, four are public companies. Another 8 are subsidiaries of public companies.”

Why shouldn’t every SEC case have admissions?

“Good question. The SEC is using public resources. And presumably, the SEC doesn’t launch bogus investigations. Aren’t all of these cases good cases? And you will hear the director of enforcement saying — we only bring the good cases. The bad cases get weeded out. Then why shouldn’t all of these cases have admissions when they settle?”

And what’s your answer?

“The answer is — if you require admissions in every case, it’s going to be impossible to secure settlements because the defendants are going to fight it tooth and nail.”

Do you believe that to be the case?

“To some extent. I don’t understand why you wouldn’t get admissions from individuals. Firms don’t want to admit out of fear of collateral consequences — that they are going to get sued. For the vast majority of SEC defendants, they are not going to get sued. They are judgment proof. There is no money left.”

What about the big corporations?

“The big companies are going to get sued anyway. If there is an SEC finding of liability, the admission is just going to go to the damages portion. And for some cases, the answer is going to be — that’s exactly right, this is how it should proceed.”

You mean, we should force admissions?

“Yes. We should force admissions. When people say — corporate fines are a terrible idea, corporate damages are a terrible idea — these are innocent shareholders paying twice. The quintessential case is an accounting fraud case where the shareholders were just along for the ride. They didn’t benefit from the accounting fraud. If anything, they were harmed by the accounting fraud.”

“In those cases, you could argue that maybe the corporations shouldn’t be paying a fine.”

“But if you look at the financial firms that the SEC targets — companies like Citigroup, Morgan Stanley, JP Morgan, Bank of America — the things they do are not accounting frauds. They steal from their customers — overcharge fees, conflicted transactions, non-disclosed commissions, late trading, market timing — from these types of deals, shareholders benefit. If that is the case, you should impose a penalty on Bank of America, you should make it easy for the defrauded customers to get their money back.”

Then why are they not forcing admissions in those cases?

“I’m not sure why. These are ripe for some kind of admissions policy. Or the SEC sets up some kind of a fair fund and the SEC compensates the victims.”

You say — I’m not sure. One answer might be straight up political power. In your article about the politics of the SEC, you don’t address this issue. But it is a question of political power. Why doesn’t the SEC adequately enforce the law? Does the revolving door have anything to do with this? Mary Jo White after all was swinging between the SEC and Debevoise. Same with Andrew Ceresney.

“It’s a fair complaint. Here is how I hear people justify it. Whenever some part of JP Morgan does something bad and they get involved in an SEC enforcement action, it’s only one small subsidiary of JP Morgan. JP Morgan has 2,000 subsidiaries.

Why should the entire firm be sanctioned for one small portion of its firm? I get that argument when the sanction falls on the holding company. It doesn’t make sense. But it is not persuasive in cases I described to you earlier. Charging commissions to your private equity clients and lying to them about it. You should pay that money back. You should be sued.”

“Maybe the story is political. Maybe the story is — the clients are sophisticated, they are smart. Plus, we know plaintiffs lawyers are a bunch of thieves. But if there is a revolving door to the SEC staff, it’s never to plaintiff side law firms.”

“But there is another aspect to admissions that supports your narrative. The only real risk with an SEC admission is when there is a scienter based admission. A private cause of action requires the plaintiff to plead scienter. Negligence based settlements will not be scary at all. Negligence is useless to private litigants. If you look at the 13 admissions of public companies, they are all for negligence based admissions – not one is scienter based claims. The only admissions to scienter based have been against individuals or against small private based firms.”

What is your explanation for that?

“A large firm will not agree to an admission because — oh boy, the threat of liability is so great, we don’t know what will happen, and therefore we will not admit to a 10b-5 scienter based violation.”

“There is a second explanation. The change in admission policy coincides in the change of disqualification rules. In September 2013, the rule on disqualification of private placements came into effect. If the defendant is found to have violated scienter based provisions of securities laws — not negligence — they are disqualified from the private placement market. In terms of the amount of capital, private placements are as much as all public offerings combined. It’s a huge market. They are useful for hedge funds, private equity funds — all of these funds rely on private placements.”

“One way to avoid being disqualified is to seek a waiver. This something Commissioners Kara Stein and Luis Aguilar and Senator Elizabeth Warren have focused on. One way to avoid disqualification is to secure a waiver. Ultimately, a way to avoid disqualification in the first place is to refuse to admit to a scienter based settlement. That’s why you are seeing only negligence based settlements for public companies. And if you are the SEC, you say to the company — you did something really fraudulent, but we can’t get a scienter based provision, fine — we are going to insist on an admission for negligence.”

Have you written this up yet?

“No, I’m in the process of writing this up. This is the summer writing project. I’ll have a draft at the end of the summer.”

The SEC could get scienter based admissions, but the companies won’t agree to them?

“These large financial firms will not agree to a scienter based settlement.”

When was the last time a large public company agreed to a scienter based settlement?

“The last one that I know of is Och Ziff in September 2016. The firm admitted liability and the settlement was a scienter based settlement and the company didn’t get a waiver. Part of the reason the SEC thought they could push this one was that Och Ziff pled guilty. It was the easy case. Pull up any large financial firm case, and they are not scienter based.”

[For the complete q/a format Interview with Urska Velikonja, see page 31 Corporate Crime Reporter 17(11), May 1, 2017, print edition only.]

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