Thursday, February 10, 2011

Without Admitting or Denying

It's not an FCPA specific issue, but it's certainly an FCPA enforcement issue.

A company is the subject of a SEC FCPA enforcement inquiry.

A civil complaint is generally filed, and then, on the same day, the company "without admitting or denying" the SEC's allegations agrees to resolve the case.

See here for the recent SEC FCPA enforcement action against Maxwell Technologies.

At PLI's "SEC Speaks" event last week, SEC Commissioner Luis Aguilar shared (see here) his "wishes for 2011" including "the Enforcement Division must bring cases with obvious deterrent effect."

Commissioner Aguilar stated as follows:

"As we work to build a pro-active regulator, my second wish is that the SEC Division of Enforcement brings cases that have obvious deterrence value. I know that this is a wish that is shared by our Enforcement staff. This means that when the Commission announces the resolution of a matter we would notice a reaction that we haven’t always witnessed.

I envision a world where when the SEC announces a settlement in a high profile case, its impact is clearly noted — and leaves little doubt that it will make people that are engaged in similar activities think twice. An enforcement action by the SEC should be serious business, and it should cause an organization to seriously review how it has been operating. Moreover, our enforcement actions should have market-wide impact, and there should be sanctions that are significant enough to stop similar conduct in its tracks. The possibility of being sanctioned by the Commission should not be considered part of the cost of doing business.

I envision a world where our remedies are calibrated to be meaningful, not merely routine - and where federal judges can clearly see that the SEC understands its mission and seeks to protect investors and deter wrongdoers by obtaining appropriate sanctions and meaningful deterrence.

An additional wish for 2011 is to see defendants take accountability for their violations and issue mea culpas to the public. I hope that 2011 brings an end to the press release issued by a defendant after a settlement explaining how the conduct was really not that bad or that the regulator over-reacted. I hope that this revisionist history in press releases will be a relic of the past. If not, it may be worth revisiting the Commission’s practice of routinely accepting settlements from defendants who agree to sanctions “without admitting or denying” the misconduct." (emphasis added).

I agree. It is worth revisiting this central feature of SEC settlements.

The policy was first adopted in 1972 (see here) and states as follows.

"The Commission has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations."

The resolution policy can lead to absurd results (see here).

In the FCPA context, I submit this SEC resolution policy contributes to a "facade of enforcement" and results in companies resolving an SEC FCPA enforcement action notwithstanding dubious or untested legal theories and regardless of valid and legitimate defenses.


It is simply easier and more cost efficient to settle an enforcement action "without admitting or denying" the SEC's allegations than to engage in long protracted litigation with a primary regulator.

My recent "Facade of FCPA Enforcement" piece (here) contains a discussion of the SEC v. Bank of America case. Although not an FCPA case, the party's briefs provide valuable insight into the same SEC enforcement procedures used in FCPA enforcement actions and the motivations of settling parties in a government enforcement action. Even the SEC noted in that case that "the terms of a reasonable settlement do not necessarily reflect the triumph of one party's position over the other."

Thus, I agree with Commissioner Aguilar that it is worth revisiting the Commission’s practice of routinely accepting settlements from defendants who agree to sanctions “without admitting or denying” the misconduct.

This policy contributes to a "facade of enforcement," including in the FCPA context, and the starting analysis should be - why did the Commission adopt this policy in the first place?

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