[S-3] SEC Enforcement Chair: Mitchell E. Herr Holland & Knight Miami, FL Panelists: LeeAnn Gaunt Peter K.M. Chan Kenneth R. Artin U.S. Securities and Exchange Commission Boston, MA Morgan Lewis Chicago, IL Bryant Miller & Olive Orlando, FL 1
SEC Enforcement Investigations The U.S. Securities and Exchange Commission (SEC or Commission) is the law enforcement agency specifically charged by Congress with civil enforcement of the federal securities laws. The SEC has authority to investigate all violations of the securities laws by any person or entity it believes may have committed a violation. Overview of SEC Investigations The SEC will initiate an enforcement investigation when it has reason to suspect that the federal securities laws have been violated. An SEC investigation typically involves scrutiny of all persons involved in the conduct in question. For instance, in an investigation concerning a municipal issuance, the SEC will typically investigate the issuer, its officers and key employees, the underwriters, the financial advisor, and bond counsel. The SEC s Division of Enforcement SEC investigations are conducted by its Division of Enforcement. The Enforcement Division has over 1,200 professional personnel (attorneys, accountants, and other staff) in its Washington, D.C. headquarters and eleven regional offices across the country. In early 2010, former SEC Enforcement Director Robert Khuzami created five specialized units to focus the SEC s enforcement efforts in particular areas of the securities laws, including municipal securities and public pensions. Informal versus Formal Investigations The SEC may gather facts and make a charging decision either through an informal or formal investigation. Both are serious. Indeed, informal investigations that never reach the formal stage still often result in SEC enforcement charges. At the informal stage, requests for documents or witness testimony are voluntary. When the staff wants authority to subpoena documents or compel witness testimony, it obtains a Formal Order of Investigation. The Commission has delegated authority to issue Formal Orders of Investigation to the Director of the Division of Enforcement; this authority was sub-delegated to senior officers. Under this delegated authority, the enforcement staff can obtain a Formal Order of Investigation within as little as one day. The Director of Enforcement also has delegated authority to file an action in federal district court to enforce the SEC s subpoenas. Under the Commission s Rules Relating to Investigations, a person who is compelled to produce documents or testify has the right to be shown the Formal Order of Investigation; however, furnishing a copy of the formal order rests in the discretion of senior enforcement personnel. SEC Investigations are Not Public Regardless of whether they are informal or formal, all SEC investigations are non-public, 2
meaning that neither the Commission nor the staff should acknowledge or comment on the investigation unless and until charges are brought. However, parties under investigation may, and are sometimes obligated to, disclose the pendency of the investigation. Bond disclosure counsel may advise disclosing the investigation in the official statement or elsewhere. Cooperation in Investigations The SEC has stressed repeatedly the need for cooperation with its investigations. In its October 23, 2001, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions (the Seaboard Report ), the SEC stressed that it would look to the following four factors to assess an issuer s cooperation: self-policing; self-reporting; remediation; and cooperation with its investigations. In order to give proper consideration to an investigatory subject s cooperation or lack thereof, senior enforcement staff have publicly stated that the division keeps a running scorecard of cooperation during an investigation. In an April 29, 2004 speech, the SEC s Director of Enforcement explained how cooperation can lead to more favorable outcomes for companies: The... core factor, which will often prove decisive in our analysis [regarding what, if any, penalty to seek], is the extent of a violator s cooperation, as measured by the standards set forth in the [Seaboard] Report.... [T]he provision of extraordinary cooperation... including self-reporting a violation, being forthcoming during the investigation, and implementing appropriate remedial measures (including, in the case of an entity, appropriate disciplinary action against culpable individuals), can contribute significantly to a conclusion by the staff that a penalty recommendation should be more moderate in size or reduced to zero. Similarly, in a January 4, 2006, statement concerning financial penalties, the SEC reiterated that [t]he degree to which a corporation has... cooperated with the investigation and remediation of the offense, is a factor that the Commission will consider in determining the propriety of a corporate penalty. The Potential Benefits of Cooperation with the SEC In many instances, cooperation with an SEC investigation has mitigated what otherwise would have been a harsher outcome. However, the SEC has made clear that only the most 3
complete cooperation will warrant a pass from any enforcement action. Of course, when the SEC believes that an actor has been affirmatively uncooperative, it will mete out even harsher penalties than might otherwise be warranted by the underlying conduct. The Potential Benefits to an Individual of Cooperation with the SEC Although the SEC articulated standards for corporate cooperation in its October 2001 Seaboard Report, the SEC had not systematically addressed the question of individual cooperation. This led many practitioners to question whether the SEC would give cooperating individuals appropriate credit. In January 2010, the Commission issued a formal policy statement on individual cooperation that set forth the analytical framework the Commission will use to balance the tension between the objectives of holding individuals fully accountable for their misconduct and providing incentives for individuals to cooperate with law enforcement. The framework sets forth four considerations that the SEC will examine: the assistance provided, including the quality of the information provided and the amount of time and resources saved; the nature of the individual s cooperation, including whether it was voluntary and whether the information was requested or might not have been otherwise discovered; the importance of the underlying matter, including the character and importance of the investigation and the dangers to investors from the violations; and the societal interest in holding the individual accountable, including the severity of the individual s misconduct and the culpability of the individual. This framework signals the Commission s clear intent to appropriately reward individuals who cooperate with its enforcement investigations. The Enforcement Division is implementing the Commission s cooperation policy through a cooperation initiative that former Director Khuzami has stated has the potential to be a game-changer for the Enforcement Division. Related Investigations and Coordination with Other Agencies The SEC can share investigative information and coordinate its efforts with any number of foreign, federal, state, and local criminal, civil, or regulatory agencies. In the municipal arena, it has been common for the SEC to share information bearing on the tax-exempt status of a bond with the IRS. The SEC also frequently coordinates its investigations with other law enforcement authorities, both civil and criminal. In recent years, there has been approximately a 400% increase in the number of SEC investigations (in general, i.e., not limited to the municipal arena) that are coordinated with criminal authorities. A striking example of such coordination in the municipal arena are the highly coordinated investigations into bid rigging for Guaranteed Investment Contracts (GIC). In 2007, the SEC, DOJ, FBI, IRS, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and a coalition of state Attorneys General launched a sweeping, coordinated investigation into anticompetitive GIC bidding practices. To date, the investigative 4
team has collected $743 million from several settlements, including with UBS Financial Services, Inc.; J.P. Morgan Securities, LLC; Banc of America Securities, LLC; Wachovia Bank, N.A.; and GE Funding Capital Market Services. Eighteen individuals have also been indicted, twelve of whom have pled guilty to criminal charges. The SEC continues to increase its coordination with criminal authorities, having former federal criminal prosecutors as the Commission s chair and in key positions in the Enforcement Division, including the Director of Enforcement. With the Enforcement Division now staffed at key levels by former federal criminal prosecutors, there continues to be increased coordination with criminal authorities and other regulators in approximately 75% of the SEC s highest-priority cases. Parallel Civil and Criminal Investigations The prospect of coordination between the SEC and other prosecutorial or regulatory authorities substantially increases the complexity of and risks attendant to an SEC investigation. The risks are often difficult to assess because, as a policy matter, the SEC will not confirm or deny whether parallel investigations are being conducted, but will direct counsel to inquire with whatever other prosecutorial authority she may be concerned about. Additionally, in many cases the SEC will conclude its investigation and resulting enforcement action before the first sign of any criminal interest in the matter becomes visible. As a practical matter, if the circumstances might be attractive to a criminal prosecutor (for example, if there is intentionally fraudulent conduct and significant investor losses), the safest course is to assume that there is or will be a parallel criminal investigation. In these circumstances, SEC defense counsel will often bring white-collar criminal defense counsel into the matter to help navigate the many difficult issues raised by parallel civil and criminal investigations. The Process of an SEC Investigation Typically, SEC investigations follow a predictable course: document requests; witness testimony; Wells Notice and Wells Submission; and settlement negotiations. Document requests. Most SEC investigations begin with a request for documents. In an investigation of any consequence, the SEC likely will make several sets of document requests. Witness testimony. If the SEC, after reviewing the document productions, continues to have an investigatory interest, it will request sworn witness testimony. Wells Notice and Wells Submission. After witness testimony has been completed, the SEC s investigative staff will review the evidentiary record to determine whether to recommend that the 5
Commission institute charges. If the staff tentatively decides to make an enforcement recommendation to the Commission, in non-emergency cases it issues a so-called Wells Notice to the proposed defendant (typically by telephone and follow-up letter). The proposed defendant is given an opportunity (normally about three weeks) to respond with a Wells Submission a detailed legal memorandum or videotape explaining its position. Settlement negotiations. If defense counsel does not succeed in convincing SEC staff that no enforcement action is warranted, counsel will routinely engage the staff in settlement discussions to determine whether the matter can be resolved on mutually agreeable terms. The SEC s Enforcement Manual On June 4, 2015, the SEC s Division of Enforcement publicly released a revised version of its Enforcement Manual. The Enforcement Manual provides valuable insight into the SEC s investigatory process and is required reading for any attorney dealing with an SEC enforcement investigation. Among other things, the Enforcement Manual explains how the Enforcement Division: ranks investigations and allocates scarce enforcement resources; reviews the status of pending investigations; handles referrals from the public, the PCAOB, state regulators, Congress, and the SROs; opens and closes investigations; and obtains formal orders of investigations. The Enforcement Manual also explains: the Wells Process; how the Commission considers enforcement recommendations; and various investigative practices, including: o communications with senior SEC staff; o tolling agreements; o handling of parallel investigations; o document requests and subpoenas; o the requirement that settling parties confirm the completeness of document production; o procedures for taking testimony; 6
o witness assurance letters, immunity orders, and proffer agreements; o attorney-client, work-product, and Fifth Amendment assertions; o inadvertent production or productions without privilege review; o requests for waiver of the attorney-client privilege; o confidentiality agreements; and o informal referrals to federal or state criminal agencies or others including state bars. Finally, the Enforcement Manual contains a detailed explanation of how the Enforcement Division employs its analytic framework for individual cooperation and its cooperation tools. SEC Document Requests After learning of a potential SEC investigation, the subject s foremost obligation is to preserve, without alteration, all potentially relevant documents, in both hard copy and electronic formats. The subject (and its employees) must ensure that no copies of relevant electronic files, including emails, word-processing and spreadsheet files, and backups, are destroyed or overwritten, even inadvertently. This often includes suspending automatic email or document purging programs during the pendency of the investigation. The investigatory subject must preserve all documents within its custody or control including, for instance, documents in the custody of its outside professionals, such as bond counsel. Electronic Documents Electronic documents are particularly problematic because they are easily altered or deleted, often through routine electronic data policies. For example, an issuer might regularly delete emails of a certain age or recycle backup media, both of which destroy potentially relevant data. Moreover, often it is not obvious where relevant electronic documents may reside. The Consequences of Inadequate Document Preservation The Sarbanes-Oxley Act of 2002 ( SOX ) provides for serious criminal penalties for document destruction intended to interfere with a governmental investigation. Section 802 of SOX provides for criminal penalties of up to twenty years imprisonment for anyone who: knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation... of any matter within the jurisdiction of any department or agency of the United States. Importantly, section 802 does not require that there be a pending investigation at the time of the conduct; a person can violate this section simply by being aware of a potential governmental investigation. This prohibition applies to all persons, including municipal issuers, their officers, 7
their employees, their legal counsel, their accountants, and other representatives. SOX section 802 also provides for fines of up to $10 million. Additionally, the SEC can impose significant monetary penalties on issuers that do not preserve and timely produce relevant documents. Document Preservation A senior official of the issuer (preferably its attorney) should instruct its information technology department to ensure that no potentially relevant electronic files, including backup media, are overwritten. These preservation efforts might well require alteration of routine electronic data policies. Similarly, employees should be instructed to preserve all relevant electronic files, regardless of whether they reside on their desktop or laptop computers, home computers, personal digital assistants, or temporary storage devices. Document preservation efforts should be broad and inclusive. However, just because potentially relevant documents are being preserved does not mean they necessarily will be produced to the SEC. SEC defense counsel will negotiate the scope of production with SEC staff and will review the issuer s and its employees documents for responsiveness and privilege before producing them to the SEC. The SEC s Document Requests In SEC investigations, the staff routinely asks for the production of a broad range of documents. The SEC typically requests production of electronic data, such as documents from file and email servers, hard drives, and other storage media. It may even request the restoration of certain backup media. It is often possible to negotiate the scope and sequence of a document production with the SEC staff. It is vital that SEC staff regard the producing party as making a timely and complete production of all non-privileged, responsive documents. The SEC frequently will follow up its initial document requests with additional document requests directed to individual officers, employees, and third parties, as well as with supplemental requests to the issuer. The SEC staff frequently requires producing parties to certify the adequacy of their searches for documents and the completeness of their productions. The Role of an Outside e-discovery Vendor Because electronic data productions are complex, expensive, and time-consuming, an outside expert in electronic discovery can provide valuable assistance. The vendor can help the issuer identify and preserve relevant data sources, copy electronic data in a forensically sound manner (with no alteration of metadata), eliminate duplicates, search the remaining document collection by key words, run preliminary privilege screens, host the electronic document collection online, provide a web-based review tool to facilitate attorney review, and, finally, properly format the documents for production to the SEC. Additionally, many e-discovery vendors now provide some form of predictive coding, which is a preliminary processing tool endorsed by an increasing number of courts to find key documents electronically without requiring manual review, thus potentially saving the often 8
significant expenses associated with attorney document review. Selective Disclosure of Information to the SEC The question of whether an issuer can selectively disclose privileged information to governmental authorities without waiving the privilege with respect to all others has come to the fore in recent years largely because: (1) SOX has put pressure on issuers to uncover potential wrongdoing, resulting in an unprecedented number of internal investigations; and (2) government enforcement authorities (such as DOJ and the SEC) have rewarded issuers that cooperate by sharing their internal investigative findings. Indeed, in cases where the SEC has spared an issuer from any enforcement action, the issuer s cooperation included sharing the results of its internal investigation with SEC staff. Issuers have tried to maintain that they can selectively disclose such privileged information to governmental authorities, but not waive their privileges with respect to the rest of the world. The DOJ and SEC have supported selective disclosure through various means, including entering into confidentiality agreements that purport to maintain the privilege with respect to third parties, accepting disclosures in forms that do not leave paper trails (such as oral disclosures or opportunities to review but not retain copies of documents), and supporting the principle of selective disclosure in amicus briefs filed in private litigation. However, given the current state of the law, issuers should assume that any disclosure of privileged information to the government regardless of whether a confidentiality agreement is in place and regardless of the form of the disclosure runs a severe risk of waiving the attorneyclient privilege and work-product immunity. Witness Testimony The SEC likely will take sworn testimony from current and former officers and employees, and outside professionals, such as bond counsel, underwriters and financial advisors. SEC staff often will begin with lower-level witnesses who can explain the organizational structure, the availability and location of documents, and basic information concerning the bond issuances or other matters under investigation. The staff will then proceed up the hierarchy to those witnesses whose actions can be imputed to the issuer and who themselves might be the subject of an enforcement action. Preparing a witness for testimony is perhaps the most important aspect of defending an SEC investigation. Sworn testimony is often a witness s best opportunity to explain her (and the issuer s) side of the story to SEC enforcement staff. The testimony will be a strong consideration in the staff s formulation of a charging decision and will lock in the witness s testimony in the event that charges eventually are brought. Before holding preparation sessions with the witness, defense counsel will review all relevant documents that were written or received by the witness or which might help refresh the witness s memory. Experienced SEC defense counsel can anticipate the staff s lines of inquiry and can help the witness put herself and the company in the best possible light, offering testimony that is both inherently credible and consistent with the documents and other testimony the staff is likely to hear. 9
Typically, several SEC enforcement staff participate in examining a witness. A staff attorney (the line-level investigator) usually leads the examination, with a supervisor and other enforcement staff (such as accountants) asking follow-up questions to ensure that a thorough record has been made. SEC investigative testimony is under oath and on the record. Witnesses have the right to refuse, under the Fifth Amendment to the U.S. Constitution, to give any information that may tend to incriminate her or subject her to a fine, penalty, or forfeiture. Witnesses should be aware, however, that the government will draw an adverse inference of wrongdoing from a refusal to testify, which can prejudice the witness s ability to defend against SEC civil charges. SEC defense counsel may: advise the witness before, during, and after the conclusion of such examination; briefly ask clarifying questions of the witness at the conclusion of the examination; and make summary notes during the examination. Joint Representations An issuer will often want the same counsel to represent both it and its current and former officers and employees. In an investigation of any complexity, it is expensive for counsel to become sufficiently familiar with the issues, relevant documents, and witness testimony to be able to competently represent a single employee in SEC testimony. It would be unduly costly if the issuer were required to obtain separate counsel for each of its present or former officer or employee witnesses. For this reason, the issuer typically will offer, at its expense, to have its defense counsel represent each of its officer and employee witnesses at their SEC testimony. Multiple representations also have the advantage of making the issuer s counsel privy to the testimony of all commonly represented employees. Because SEC investigations are confidential, only the counsel who represented the witness in testimony can order a copy of the witness s transcript. Indeed, if the issuer s counsel did not represent an employee during testimony, the staff usually will not allow that counsel to review the witness s testimony unless and until a Wells Notice has been issued. SEC defense counsel may represent multiple witnesses in testimony provided that there are no actual or potential conflicts of interest amongst the issuer and each commonly represented officer or employee witness. That said, the SEC s cooperation tools may have an impact on multiple-representation scenarios. With the SEC s cooperation policies in effect, regardless of whether there are conflicts between witnesses, it may be in the interest of one witness to be the first to report the misconduct to the SEC and offer cooperation. For this reason, the SEC s cooperation program is bound to heighten the ethical concerns of defense counsel and may lead to fewer multiple representations. While the SEC will permit defense counsel to represent multiple witnesses during their 10
investigative testimony, the SEC typically advises witnesses on the record that they have a right to be represented during their testimony by their own personal counsel. Joint Defense Agreements In the event that a present or former officer or employee retains personal counsel, the issuer might partly secure the economic and informational advantages of a multiple representation through a joint defense agreement (JDA). Provided that the parties have a common interest in defending an SEC investigation, a JDA allows parties even those who have potential or actual conflicting interests to share privileged communications and work product without fear of waiver. Thus, through a JDA, issuer s counsel can help a separately represented witness more efficiently prepare for her SEC testimony by sharing work product with her counsel; the issuer s counsel can even participate in the preparation sessions. Likewise, through a JDA, the issuer s counsel may learn the substance of the testimony of a separately represented witness. Because the SEC may ask about the existence of a JDA, SEC defense counsel will not want to enter such an agreement with any witness whom the issuer likely will want to portray as a rogue whose actions were unauthorized. Opportunities for Advocacy During the Investigation During the investigation, SEC enforcement staff usually will not share its concerns with counsel. Nevertheless, there are numerous opportunities for advocacy during the course of the investigation. Near the outset of the investigation, the issuer may ask its SEC defense counsel to give the staff an overview of the matter, possibly even providing the staff with key documents. Such a presentation must be accurate and balanced if the issuer and counsel are to have credibility with the staff. Such a presentation can demonstrate an issuer s cooperation and, at the same time, present the issuer s views at an early date to SEC decision-makers who are more senior than those who will be involved in the day-to-day conduct of the investigation. As the investigation unfolds, counsel may find that the staff is laboring under a misapprehension of law, fact, or expert knowledge. Counsel might find it advantageous to correct this misapprehension. If, at the conclusion of the testimonial phase of the investigation, SEC staff makes a preliminary determination to recommend charges to the Commission, it will issue a Wells Notice (discussed below) to the proposed subject of such charges. On the other hand, if the staff does not issue a Wells Notice, a potential subject may hear nothing about the status of the investigation for a long time, and can only guess the staff s intentions. In such instances, SEC defense counsel normally will simply await further contact from the staff. However, in cases where counsel believes that her client has an especially strong position or where she is concerned that lower-level staff might not accurately summarize the investigatory record to their superiors, defense counsel may consider providing more senior staff with her views on what the investigative record has established. This kind of pre-wells submission must be approached cautiously, because the staff could re-open the record to fill any 11
holes that the submission identifies in the investigatory record. Wells Notice and Wells Submission The Wells Notice outlines the legal charges that the staff is prepared to recommend to the Commission and, sometimes, the factual basis for those charges; Wells Notices are usually given telephonically, followed by a written confirmation. Although not required by the SEC s rules, the staff will usually give the proposed subject of enforcement charges an opportunity to review all relevant testimony and exhibits. Under the Dodd-Frank Act, not later than 180 days after the SEC staff provides a written Wells Notice to any person, the staff must either file an action against the person or provide notice to the Director of Enforcement of its intent not to file an action. The subject of a Wells Notice may make a Wells Submission, which is an opportunity for the proposed defendant to explain its position via a memorandum or (less commonly) videotape. A Wells Submission may argue that no enforcement action is warranted or that lower-level charges and less severe relief are appropriate; it may also argue in favor of a proposed settlement. While Wells Submissions can be effective defense tools, they must be approached with care. The SEC warns that [t]he staff of the Commission routinely seeks to introduce [Wells] submissions... as evidence in Commission enforcement proceedings. Additionally, they may be discoverable in civil litigation with third parties. The SEC generally refuses to accept Wells Submissions that have been submitted under claims of privilege or as settlement materials. The Charges and Remedies Available to the SEC The SEC may proceed against an issuer and its officers and employees in federal court or in its in-house administrative tribunals. The SEC is authorized to seek several forms of relief, including: An order against future violations in the form of an injunction when the SEC proceeds in federal court, and a cease-and-desist order when it proceeds administratively; A censure when the SEC proceeds administratively; Financial penalties; and/or A temporary or permanent bar from the securities industry. Additionally, as a condition of settlement, the SEC often seeks other forms of relief such as undertakings to improve relevant policies and procedures, and appointing and adopting the recommendations of an independent consultant. Historically, the SEC had not sought financial penalties against municipal issuers. However, the Commission has gotten over that historical reluctance. In 2013, the SEC required a $20,000 penalty as a condition of settlement from the issuer in In the Matter of The Greater Wenatchee Regional Events Center Public Facilities District, Allison Williams, Global Entertainment Corporation, and Richard Kozuback, Sec. Act. Rel. No. 9471 (Nov. 5, 2013). And, 12
the SEC has a history of requiring financial penalties from municipal officers and employees. See, e.g., S.E.C. v. Gary J. Burtka, No. 14-cv-14278, Litig. Rel. No. 23229 (E.D. Mich. Apr. 6, 2015) (imposing $10,000 penalty on former mayor). There are three tiers to the SEC s penalty authority. For entities, the SEC may impose a penalty not to exceed (1) the greater of defendant s gain 1 or $80,000 for any violation, (2) the greater of defendant s gain or $400,000 for violations involving fraud, deceit, manipulation or deliberate or reckless disregard of a regulatory requirement, and (3) the greater of defendant s gain or $775,000 when such violation directly or indirectly resulted in substantial losses or created a significant risk of substantial losses. The penalty scheme for individuals follows the same pattern, with the amount of the tiers being (1) $7,500; (2) $80,000; and (3) $160,000. In applying this penalty scheme, the SEC has considerable discretion in determining the number violations that occurred. Under the Municipal Continuing Disclosure Cooperation (MCDC) initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with the continuing disclosure obligations specified in Exchange Act Rule 15c2-12. The settlements will be achieved through administrative proceedings in which the respondent (1) neither admits nor denies the SEC s findings, (2) is censured, (3) is ordered to cease-and-desist from future violations, and (4) is ordered enhance its continuing disclosure compliance (underwriters will have to retain and adopt the recommendations of an independent consultant and issuers will have to enhance their policies and procedures and conduct training). Additionally, for underwriters, the Enforcement Division will recommend a monetary penalty not to exceed $500,000, and for municipal issuers it will recommend that no monetary penalty be imposed. Under MCDC, the Enforcement Division is not providing any assurances with regard to individual liability, and has warned that it will likely seek greater sanctions (including financial penalties) for underwriters and issuers who did not participate in the program. Settlement Negotiations At appropriate points in the enforcement process (during the fact gathering stage, in connection with or following a Wells Submission, and even after an enforcement action has been commenced), a party can discuss settlement with the SEC staff. The staff does not have independent authority to accept a settlement. That said, settlement offers that do not have staff support are rarely accepted by the Commission. A settlement reached prior to the commencement of an enforcement action often results in a reduction of the charges or relief that the staff would otherwise seek, whereas the range of compromise available post-commencement is usually more circumscribed. The SEC routinely issues press releases when it brings and settles enforcement actions. Thus, when a matter is settled before an enforcement action is commenced, there is a single press event. When a matter is settled post-commencement, there are two press events: first, when the 1 The gain measure only applies when the SEC proceeds in federal court. 13
matter is brought; and second, when it is settled. Admissions of Liability Historically, the SEC s policy has been to allow a party to settle with the SEC without admitting or denying the SEC s allegations. Under this long-standing policy, when a party settles a federal injunctive action, neither the court nor the SEC makes any factual finding. The SEC files a complaint making its allegations, and the court enters a final judgment that enjoins the defendant and may order other relief, but includes no findings of fact. However, when a party settles an SEC administrative action, the settling party (albeit without admitting or denying the SEC s charges) allows the SEC to make certain factual findings and conclusions of law. In such no admit/no deny settlements, the settling party is prohibited from publicly denying the SEC s charges, but is permitted to defend itself in litigation with parties other than the SEC. Faced with recent criticisms that the SEC s no admit/no deny policy was too lenient and failed to impose accountability on settling parties, the SEC has changed its policy going forward to require certain settling parties to admit liability in order to settle with the SEC. In January 2012, former Director of Enforcement Khuzami announced that a party that admits guilt in order to resolve a parallel criminal prosecution, including non-prosecution agreements or deferred prosecution agreements that include admissions or acknowledgments of criminal conduct, must admit liability in any SEC settlement. SEC Chair Mary Jo White announced a further change in the SEC s settlement policy in June 2013 to require certain settling parties to admit wrongdoing even if there has been no admission of guilt in a related criminal proceeding. The types of cases that might require such an admission of wrongdoing include those where: a large number of investors were harmed, or the market or investors were placed at risk of serious harm; obtaining an admission of wrongdoing would serve a protective purpose, such as where the settling party engaged in egregious intentional misconduct; or the settling party unlawfully obstructed the SEC s investigative process. While the SEC has demanded and obtained acknowledgements of wrongdoing under the new admissions policy in certain cases, this policy has not yet been applied in the municipal arena. 14