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News January 16, 2012 Issue

SEC Shifts Policy on Settlement Language for Cases Involving Criminal Conduct

The federal court spotlight on SEC settlement practices over the past year has given the SEC an opportunity to look at what they do with fresh eyes.

For the past 40 years or more, the SEC has permitted respondents in administrative proceedings to settle serious allegations of wrongdoing without admitting or denying those allegations.

This serves the public interest and protection of investors, said the SEC, while preserving important rights of the respondent in subsequent specific factual circumstances. Without the ability to settle actions in this manner, the SEC has argued that it will lose a valuable tool to bring respondents to the table and in some cases, obtain monetary disgorgement for investors that would otherwise not be available under current securities laws.

Senior enforcement staff began an internal review of this decades-old practice last spring, which culminated in discussions with the Commissioners over the past several months.

On January 6, the SEC quietly announced that it has determined that, in cases involving criminal conduct, some things will change.

"Last week we modified our settlement language for cases involving criminal convictions where a defendant has admitted violations of the criminal law," said Division of Enforcement director Robert Khuzami. The 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 criminal cases, he said.

Under the SECís traditional "neither admit nor deny" approach, a defendant found guilty of criminal conduct in court could nonetheless settle a parallel civil action with the SEC while neither admitting nor denying civil liability.

It "seemed unnecessary," said Khuzami, to retain the Ďneither admití provision in cases where a respondent has been criminally convicted of conduct that forms the basis of the civil enforcement proceeding.

The change applies to SEC cases where there is a parallel criminal conviction or certain types of agreement in place, such as non-prosecution or deferred prosecution agreements, that include admissions or acknowledgments of criminal conduct, said Khuzami.

In settlement documents under either of those circumstances, the "neither admit nor deny" language will be removed, and the language prohibiting a respondent from denying the allegations or making statements suggesting the SECís allegations are without factual basis will be retained.

The civil settlement will recite the fact and nature of the criminal conviction or agreement, and the staff will have discretion to incorporate any facts into the civil settlement documents that have been admitted as part of the resolution of any criminal proceedings.

The long-standing "neither admit nor deny" policy is still in force for actions that do not involve criminal convictions or admissions of criminal law violations, said Khuzami.

He specifically noted that the policy change was separate from and not related to the recent federal court ruling in the Citigroup case, which does not involve a criminal conviction or admissions of criminal law violations. In that ruling, Judge Jed Rakoff refused to certify a settlement in large part because Citigroup did not admit the SECís allegations of serious misconduct.

Khuzami noted the SEC is appealing that ruling.