The U.S. Securities and Exchange Commission’s enforcement chief said letting defendants settle cases without admitting wrongdoing helps maximize the agency’s ability to investigate fraud with limited resources.
“If you can reach a settlement that gets you most or all of what you think you can get” in litigation, “then you’ve fulfilled your mission to investors whose cases might not get investigated, or might not get investigated sooner, if you insist on admissions,” Robert Khuzami said today at a securities law conference in New York.
Khuzami’s comments come amid scrutiny of SEC settlements including U.S. District Judge Jed Rakoff’s questioning of the agency’s policy of letting subjects of investigations resolve claims without admitting or denying misdeeds. Rakoff is reviewing a proposed $285 million settlement with Citigroup Inc., which the SEC accused of misleading investors in a collateralized debt obligation.
“No one disagrees with the sort of abstract notion that you’d like to have admissions in your cases in the same way you’d like to have a lot of things,” including the resources to interview every witness in a case, Khuzami said. “In deciding amongst competing considerations, one has to make choices between competing demands.”
While SEC investigators will avoid prosecuting “honest mistakes,” they may bring more cases based on negligence, which has a lower standard of proof than intentional fraud, Khuzami said during a question-and-answer session at the Practising Law Institute conference.
“We will certainly consider that in the appropriate cases if there is a deviation from the appropriate standard of care and the result is that investors lost money,” he said.
Khuzami’s remarks echoed similar comments made yesterday by George Canellos, head of the SEC’s regional office in New York. Canellos said the agency’s key objectives in a settlement are to remove individuals who are committing wrongdoing from the industry and to deter other misconduct by filing a detailed complaint on the conduct in question.
In response to Rakoff’s questions, SEC litigator Matthew Martens said on Nov. 9 that the agency adopted a policy in 1972 that barred defendants from settling cases and later denying the agency’s allegations publicly. Under the policy, defendants may say they neither admit nor deny the SEC’s allegations.
In court papers, the SEC said defendants are less likely to settle if forced to admit liability, out of fear the admission will harm them in lawsuits filed by shareholders. Rakoff said that, under the proposed settlement, Citigroup could claim to be “innocent as lambs” in any separate litigation based on the same transactions.
-- Editors: Gregory Mott, Maura Reynolds