You Don’t Want to Mess With Wall Street’s Cop

With its recent insider-trading settlement against SAC Capital Advisors LP, the Securities and Exchange Commission is again under fire for its policy of letting defendants resolve fraud allegations without admitting wrongdoing.

For some critics, nothing the SEC does is ever tough enough, and no-admit settlements are just further evidence of the agency’s spinelessness.

Even some courts seem sympathetic to this critique. For example, the judge overseeing the SAC Capital case has taken the rare step of requiring the SEC to defend its settlement in court. The agency also is awaiting a decision on its appeal of another judge’s December 2011 rejection of an unrelated settlement with Citigroup Inc. arising from a mortgage-bond deal.

To its credit, the SEC has stood its ground. Settlements in which the defendant neither admits nor denies wrongdoing have been a hallmark of enforcing civil law for decades, and in many respects the SEC’s approach is more logical and transparent than that of other federal agencies. For example, the U.S. Justice Department, among others, sometimes lets settling defendants explicitly deny wrongdoing in civil cases.

Good Understanding

Since the early 1970s, by contrast, SEC policy has coupled the carrot of not requiring an admission of wrongdoing with the stick of prohibiting any public denial. Although SEC settlements don’t always recite the facts of each case in minute detail, they almost always include enough information to provide the reader with a good understanding of why the defendant was sued, what laws were allegedly violated and what sanctions were imposed. In each case, this information is filed with the court and posted on the SEC’s website for the world to scrutinize.

Still, critics say no-admit settlements let wrongdoers off too easily, muddle the public record and prevent private litigants from piggybacking on the SEC’s case to gain their own legal advantage against a defendant. One federal judge the agency’s no-admit settlement approach as creating “a stew of confusion and hypocrisy unworthy of such a proud agency.”

These concerns, though understandable, are far outweighed by the public benefits and basic fairness of the SEC’s approach. Even critics concede that no-admit settlements facilitate the prompt resolution of cases that would otherwise result in protracted litigation and consume the limited resources of both the SEC and the court system. That’s because admissions of wrongdoing would aid plaintiffs in related private lawsuits whose primary goal is to extract money from defendants rather than to ensure that justice is served. Few SEC defendants are willing to send this engraved invitation to trial lawyers.

Worse yet, by the time a settlement is reached, defendants have typically racked up huge legal bills responding to the SEC’s investigation, which can go on for years. Many are entitled to have those bills paid by their employer or an insurer during the SEC probe. But an admission of wrongdoing could negate that entitlement and trigger an obligation to pay everything back -- on top of any penalties owed to the SEC under the settlement.

Of course, critics might say “too bad.” Wrongdoers should suffer harsh consequences, shouldn’t they? But that assumes they are wrongdoers, which turns the venerable presumption of innocence on its head. Although you would never know it from most commentary about the SEC, in reality the agency is an aggressive law enforcer that often achieves settlements when guilt is debatable.

Light Burden

Compared with a criminal prosecutor, the SEC enjoys a relatively light burden of proof when it seeks penalties and other career-ending sanctions in civil prosecutions. Criminal prosecutors must prove guilt beyond a reasonable doubt, but the SEC prevails in civil cases if guilt is just slightly more likely than innocence. And the right to remain silent offers little comfort in SEC civil prosecutions because the agency can legally argue that silence is evidence of wrongdoing.

As for SEC targets who can’t afford a lawyer and have no employer or insurer to foot the bill, tough luck. The government won’t pay for one, and in most cases the defendant isn’t poor enough to qualify for legal aid or pro-bono representation by a law firm.

The SEC also benefits from knowing that most companies and executives can’t withstand the negative publicity associated with contesting the SEC’s accusations, or at least aren’t willing to take their chances.

Even Goldman Sachs Group Inc. settled just months after the SEC sued the firm in April 2010 over a collateralized-debt transaction, although the firm had defenses that many legal experts considered compelling. By the time it settled two months later, Goldman had endured a 24 percent stock-price decline along with a media feeding frenzy in which lawmakers and commentators largely treated guilt as a foregone conclusion.

These advantages embolden the SEC to threaten suing in situations where guilt is in doubt or the law is less than clear. Indeed, in the past year alone, judges or juries have rejected SEC allegations in at least a half-dozen prominent cases, including a unanimous Supreme Court decision in February to dismiss the agency’s claim that a mutual fund run by Marc Gabelli engaged in improper trading.

Settling cases without an admission of wrongdoing is eminently fair and reasonable, not a sign of spinelessness. Here’s hoping the SEC has the fortitude to continue defending its commendable approach to settlements.

(Russell G. Ryan, a former assistant director of the SEC’s Division of Enforcement, is a partner with the law firm King & Spalding LLP. The opinions expressed are his own.)

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