Common Attacks on the SEC's Neither-Admit-Nor-Deny Policy
The House Financial Services Committee has promised to hold hearings on the SEC’s policy of including standard language in settlement papers saying that the defendant neither admits nor denies the allegations in the SEC’s complaint. I thought I would turn to some commonly cited reasons for changing the policy and requiring admissions from defendants. I don't think they stand up, but here they are:
1. With only allegations laid out in a complaint, and no admissions or factual findings by a court, it is impossible to know what happened in a particular matter.
I don’t think this is true. With a typical federal lawsuit, the pleading standard is fairly low. But even in those cases, by signing the complaint Plaintiff’s counsel is affirming, upon risk of career-threatening sanctions, that the “factual contentions have evidentiary support or . . . will likely have evidentiary support after a reasonable opportunity for further investigation.” Fed. R. Civ. P. 11(b)(3). The standard for enforcement actions brought by the SEC is much higher. Each one is approved by at least three, and usually five commissioners, all of whom are appointed by the President, are supported by extremely capable staff, and take their responsibilities quite seriously. The commissioners’ staff review each action closely and question the enforcement staff on both the law and the facts. Then the commissioners themselves get a shot at asking why this and why not that. Getting an action approved for filing is a minor achievement. Granted, it’s minor; the audience is obviously friendly, and it is much easier to make allegations in a complaint than it is to present evidence proving them. But the idea that the SEC can say just anything in a complaint without regard to facts is far-fetched. The Commission’s complaints are based in facts.
Rob Khuzami, the SEC’s Enforcement Director, sees a reasonably clear complaint, injunctive relief, and a significant money penalty, and assumes the general public can pretty much figure out what happened in a particular case. Judge Rakoff looks at the same source material and sees Third World justice, where “propaganda reigns, and truth is confined to secretive, fearful whispers.” I tend to side with Khuzami on this.
2. Private plaintiffs should be able to take advantage of the preclusive effect of admissions made in SEC enforcement matters.
I am not convinced of this at all. Judge Rakoff wrote that permitting Citigroup to settle its complaint without admitting or denying the allegations dealt a “double blow to any assistance the defrauded investors might seek to derive from the S.E.C. litigation in attempting to recoup their losses through private litigation . . . .” This was both because of the standard policy and the negligence-based claims, not available in private litigation, that Citigroup tried to settle to. But should private plaintiffs be able to stand entirely on the SEC’s work without presenting any evidence of their own? Because that’s what they would try to do if the defendants were compelled to admit willful securities violations in plain text. There would be essentially no cost to doing so, and the numbers of plaintiffs, and law firms seeking to represent them, would be almost limitless.
Certainly the balance the Congress and the Supreme Court has struck regarding private securities litigation in recent years – including the Private Securities Litigation Reform Act, along with the Tellabs and Stoneridge cases – would be thrown off track, at least for factual scenarios that are the subject of SEC enforcement actions. Plaintiffs would not be pressed to identify facts allowing them to plead securities fraud with particularity, and with evidence leading to a strong inference of scienter. They would just point to the facts elicited from an SEC settlement and say, “Hey -- me, too!” Don’t think defendants wouldn’t price this effect into negotiations with the SEC. They would, in effect, be resolving a case with the SEC and every other potential plaintiff in the world. I suspect that is not what Congress and the Court intended when they set up these dual public/private enforcement tracks.
3. The policy allows the SEC to avoid trials in many cases. And they’re scared to go to trial, so they should have to.
I don’t buy it. Khuzami spent 11 years in the U.S. Attorney’s Office in the S.D.N.Y. and successfully prosecuted the blind sheikh Omar Abdel-Rahman, who plotted the 1993 bombing of the World Trade Center. His Chief Litigation Counsel built a securities enforcement docket out of nothing in Charlotte and tried at least a dozen cases to verdict there. Khuzami has also stacked his senior staff with former prosecutors with a lot of trial experience. This obviously isn’t true for everyone in the Enforcement Division, but do you think Khuzami would tolerate fear of courtrooms on his trial staff? They are not afraid. The SEC’s trial unit is full of capable people who would gladly take one of these major institutions to court if necessary. And I’m not convinced they shouldn’t do so for one or two of them. But to make a policy change that would essentially compel trials for all matters when the most effective relief can be settled to seems to me to be a gross waste of resources.