SEC- Plan Of Action On Firms "Admission of Misconduct"

For decades, the Securities and Exchange Commission has allowed companies and individuals to make settlements without admitting any wrongdoing. Even a company committing an egregious sin that cost investors millions of dollars could walk away from the proceedings without ever acknowledging its role.

But in mid-2013 the agency declared that it was doing an about-face.

“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,” Andrew Ceresney, the S.E.C.’s head of enforcement, said in a June 2013 email to his lieutenants.

The program represented a seismic shift in approach, but in practice it is still in its early stages. After two years, the S.E.C. has generated admissions of culpability in 18 different cases involving 19 companies and 10 individuals. Given the hundreds of settlements struck by the S.E.C. over this time, it is clear that most of the time defendants are still being allowed to settle without admitting to or denying the agency’s allegations.

S.E.C. officials say this age-old practice saves it from having to bring — and possibly lose — a case in court, allows the agency to return money to victims more quickly and conserves resources for other investigations.

Nevertheless, S.E.C. enforcement officials say they believe the policy change has sent a crucial message. “Requiring admissions adds a powerful tool in appropriate cases, and it has been extremely successful and positive,” Mr. Ceresney said in a recent interview. “In cases where we have obtained admissions, it adds accountability, and that has been very important.”

In determining what kinds of cases are likely to be subject to such treatment, the S.E.C. has given itself wide latitude.

In her first speech on the subject in September 2013, Mary Jo White, the S.E.C. chairwoman, cited four criteria for such cases:

■ The case harmed a large number of investors.

■ It posed a significant risk to the market.

■ Admission of culpability would let investors decide if they should deal with a person or entity in the future.

■ Disclosing the case’s facts would send a message to the market.

The following year, in another speech, Ms. White added further criteria. Admissions of culpability might be required if misconduct was intentional or if a defendant obstructed an investigation. “The new protocol continues to evolve and be applied,” she said.

As the policy evolves, it has raised concerns among securities lawyers. They contend that the broad criteria for cases fail to provide enough guidance on behavior that will attract scrutiny.

Lewis D. Lowenfels, co-author of “Lowenfels and Bromberg on Securities Fraud,” a leading treatise in the area, called for more analytical clarity.

“The S.E.C. should draft guidelines as to when the agency intends to demand admissions of facts and acknowledgments of violations of law in order to settle their enforcement actions,” he said. “Otherwise market participants are left with attempting to interpret vague and conflicting tea leaves from speeches by the S.E.C. chair.”

Mr. Ceresney said that the S.E.C. believed it had telegraphed the terms of its policy change clearly and consistently. But the SEC enforcement manual has not been updated to reflect it.

And the S.E.C. acknowledges that these cases require the same judgment calls that many of its other enforcement decisions do. For instance, even if behavior meets some or all of its stated criteria, the agency may not push for an admission of wrongdoing. It may decide that other aspects of a settlement — like a steep penalty — are severe enough.

An analysis of the cases in which the S.E.C. has secured admissions of misconduct certainly shows a wide array of facts and types of infractions.

Some of the 18 cases required acknowledgments of violations of law, while others involved lesser admissions of the S.E.C.’s findings of facts.

Most of the companies in these cases were financial firms. The other settlements involved Chinese affiliates of the big four United States accounting firms; Lions Gate, an entertainment company; and Standard & Poor’s, the ratings agency that admitted to facts stating how it misrepresented its methodology for assessing several commercial mortgage-backed securities in 2010 and 2011.

About one-third of the cases involved very large entities. They include a 2013 settlement with JP Morgan Chase arising from the London Whale debacle; a 2014 matter against Bank of America for  a major disclosure violation; and a failure-to-register case against  Credit Suisse, also in 2014. This year, the agency brought an action against Oppenheimer & Company, which admitted a violation of securities laws involving penny stock sales for customers. In 2014, Scottrade, the discount brokerage firm, acknowledged that it had failed to provide the S.E.C. with accurate information about trades.

When the S.E.C. has demanded admissions, it says it usually gets them. If a defendant balks, the S.E.C. can respond with litigation. Consider a 2014 case against Wedbush Securities, a large stock trading firm. The S.E.C. contended that Wedbush had inadequate risk controls in its business. Initially, the firm refused to admit to the allegations. After the S.E.C. brought the case before an administrative law judge, Wedbush settled, acknowledging the S.E.C.’s findings and paying a $2.44 million penalty.

A case from last summer illustrates how the new policy has continued to evolve. That matter, involving a lawyer for two corporate directors, indicates that the S.E.C. will also press for an admission of wrongdoing if it thinks such a move will help it in a suit filed against another party in the same matter.

The case dates to 2010 when the S.E.C. filed a civil suit against Samuel E. Wyly and Charles J. Wyly, directors who sat on the boards of Michaels Stores, Sterling Software, Sterling Commerce and what is now Scottish Re. The regulator accused the Wylys of evading reporting requirements and won the matter at trial last year. Its position was aided by admissions it had secured from Mihael French, a lawyer for the Wylys.

So far, the S.E.C.’s moves appear to enjoy broad support among its five commissioners, who approve its enforcement actions. Since the policy change went into effect, the commissioners have approved every case.

For now, because the S.E.C.’s criteria are so broad, almost any kind of case might qualify for treatment under the policy. It will be revealing to see how the S.E.C. uses its new power.