Admissions by companies in enforcement actions brought by the Securities and Exchange Commission (SEC) can open the floodgates to follow-on private civil litigation.  Fortunately, the SEC has traditionally settled with companies on a "no admit, no deny" basis.  That has begun to change.

As you may recall, in 2011, U.S. District Judge Rakoff of the Southern District of New York refused to approve a "no admit, no deny" settlement between the SEC and Citigroup Global Markets, Inc.  See SEC. v. Citigroup Global Markets Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011).  While that decision was recently overturned by the Second Circuit, see SEC v. Citigroup Global Mkts., Inc., 752 F.3d 285 (2d Cir. 2014), its effect lingers on.  According to the Second Circuit, district courts should still assess whether a SEC settlement is "fair and reasonable" and that the "public interest would not be disserved."  Id.

In response, the SEC has begun pursuing admissions from companies under certain "limited" circumstances.  Recently, at a 2014 Securities Litigation & Regulatory Update CLE, SEC counsel offered insight into its new settlement admissions policy, suggesting that it would it would seek an admission, rather than the traditional "no-admit no-deny" settlement, where the alleged securities violations were particularly egregious.  Counsel for the SEC then offered four "limited" circumstances that would warrant it requiring an admission at settlement:

  1. Where the violation placed investors at significant risk;
  2. Where the company's actions hindered the SEC's investigation;
  3. Where the SEC views there to be a deterrent effect to requiring an admission and wants to "send a message to the market"; and
  4. Where the SEC perceives a possible future threat.

Companies and in-house counsel should be mindful of these circumstances when dealing with an SEC enforcement action.  An admission of wrongdoing can lead to years of headaches from continuous private litigation, not to mention the significant financial costs of defending these civil cases.  Should you be faced with an SEC enforcement action, you should consider how your legal strategy can demonstrate that each of these circumstances does not apply to you, so that you can preserve the possibility of a "no admit, no deny" settlement.

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