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SEC Changes Settlement Policy Impacting the “Neither-Admit-Nor-Deny” Standard in Cases With Parallel Criminal Proceedings

Posted in Criminal Charges in Securities Cases, SEC Enforcement Cases, SEC News, SEC Settlements: Policy, Issues and Disputes

According to media reports, the SEC decided last week that it will no longer allow defendants who plead guilty in criminal proceedings to settle parallel civil charges with the Commission by neither admitting or denying the allegations. At the present, the policy shift applies only in those cases where there has been an admission of guilt, not in cases where there has been no plea or if there is only civil proceedings.

Prior to the SEC’s change, a defendant who pled guilty to criminal charges was able to settle with the SEC by neither admitting nor denying the same allegations. Frequently (though not always) if there were parallel criminal proceedings, prosecutors would seek to stay any civil proceedings with the SEC. Once the criminal case was resolved, the SEC case would proceed. Those convicted in criminal cases who did not settle with the Commission would usually face a motion for summary judgment under the legal theory of collateral estoppel because the same factual had already been resolved in the criminal case. Those defendants who pled guilty or were convicted after trial who elected to settle with the SEC had the option of doing so under the Commission’s standard "neither-admit-nor-deny" basis.

The SEC’s policy change eliminates that option in cases where the defendant has pled guilty in the criminal case. An article on Reuters.com by Aruna Viswanatha and Sarah N. Lynch quoted the SEC’s Director of Enforcement Robert Khuzami as stating that it seemed "unnecessary" for the SEC to include its traditional "neither admit nor deny" approach if a defendant was convicted of the same conduct. An article by Joe Palazzolo of the Wall Street Journal further quoted Mr. Khuzami "[t]he new policy does not require admissions or adjudications of fact beyond those already made in criminal cases, but eliminates language that may be construed as inconsistent with admissions or findings that have already been made in the criminal cases." According to Edward Wyatt’s article in the New York Times, "[t]he new policy will also apply to cases where a company or an individual enters an agreement with criminal authorities to defer prosecution or to not be prosecuted as part of a settlement."

The SEC’s "neither-admit-nor-deny" policy has been under increased scrutiny recently – Judge Jed Rakoff, in denying a motion to approve a settlement in the Citigroup Global Markets litigation, criticized the SEC’s long-standing policy as "hallowed by history, but not by reason" and expressed concern that it deprived the Court "of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact." The Citigroup case does not involve a criminal parallel proceeding and would not be impacted by the SEC’s change in policy.

The Commission, who has appealed Judge Rakoff’s ruling (and sought a writ of mandamus against him), maintains that policy change has been in the works for months prior to the Citigroup case. The Wall Street Journal article reported that the SEC stated that "the changes were made last week, after discussions that began this spring between senior enforcement staff and the commissioners."

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