SEC to Seek Admissions of Wrongdoing in Some Enforcement Actions

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The new policy will break with the ‘No Admit, No Deny’ pattern of settlements

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SEC Enforcement Director Gurbir Grewal said requiring admissions in some cases would improve the deterrent value of enforcement actions and increase public confidence in financial and government institutions.

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“When it comes to accountability, few acknowledge the magnitude of wrongdoers that they have broken the law,” Mr Grewal said at an annual SEC conference sponsored by the Practicing Law Institute. “The admissions, given their attention-grabbing nature, also serve as a clarion call to other market participants to self-report the extent of misconduct that has occurred in their firm,” he added.

The withdrawal of admissions shows that the SEC is trying to set a tough tone for its enforcement program under new chairman Gary Gensler. One knock on the SEC’s civil oversight model is that it allows companies and individuals to get out of trouble by paying only fines, which often come out of shareholders’ pockets. The SEC can refer fraud cases — the most serious type of charge it investigates — to the Justice Department, which can use criminal penalties to enforce securities laws.

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The SEC may face resistance from businesses in implementing the new policy. Admitting facts that violate the law can have collateral consequences for companies.

For example, entry into SEC cases would lead to private litigation filed by investors or other parties who have been harmed by alleged corporate wrongdoing. Many securities laws can be enforced privately, so plaintiffs and their attorneys will benefit from being able to cite confessions made by firms to the SEC.

The SEC announced in 2013 that it would accept wrongdoing to companies and individuals as a condition of settling civil charges in certain cases. By failing to detect shady practices in the mortgage-bond and derivatives markets that contributed to the 2008 financial crisis, the SEC was under pressure at the time to show it could rein in Wall Street abuses. Mary Jo White, a former federal prosecutor who took over the SEC in 2013, proposed the strategy.

The agency was also shamed by a Manhattan federal judge, Jade Rakoff, who initially rejected the 2009 settlement with Bank of America. Corporation

He said it “does not conform to the most elementary notions of justice and morality.” He later approved the deal after the SEC and Bank of America increased monetary sanctions from $33 million to $150 million.

During Ms. White’s tenure, some settlements actually involved an acknowledgment of wrongdoing. Of the 2,063 cases filed from 2014 to 2017, only 2% involved admissions, according to research by David Rosenfeld, a professor at Northern Illinois University College of Law. According to Mr. Rosenfeld’s paper, only 22 entities admitted at fault in cases of fraud, the most serious statutory violation that the SEC can enforce, which was published In Iowa Law Review.

Enforcement Division Deputy Director Sanjay Wadhwa told Wednesday’s conference call that regulators would seek admission “in cases involving serious misconduct” and where large numbers of investors were harmed or where defendants obstructed the SEC’s investigation.

Mr Grewal said his division, which has a budget of about $600 million and more than 1,300 employees, also plans to closely examine when individual defendants will be allowed future positions as officers or directors of public companies. Service should be stopped. This prohibition is one of the most severe punishments a court can inflict on people accused of violating investor-protection laws.

“The decline in public confidence in our institutions is real and it hurts everyone,” he said.

Dave Michaels at [email protected]

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