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SEC to Demand More Public Accountability This Year From Wrongdoers in Financial Markets

Philip R. Stein
SEC Chair Mary Jo White announced last week that the SEC is changing its protocol relating to admissions of guilt in settlements with wrongdoers in the securities markets. Historically, SEC practice was to settle cases against entities and individuals without requiring admissions of guilt. This was thought to promote swifter settlement of claims, payment of civil penalties, and removal of wrongdoers from positions of power in the market. Beginning in June of 2013, the SEC began to modify this policy in cases involving harms imposed on large numbers of investors, where the perceived need for public accountability and acceptance of responsibility is of heightened importance.

Policy Shift: SEC To Require Admissions of Guilt In Certain Cases
During her keynote speech at the 41st Annual Securities Regulation Institute in California, White stated that the SEC will now require admissions of guilt in cases revealing “egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the wrongdoer poses a particular future threat to investors or the markets, or where the defendant engaged in unlawful obstruction of the Commission’s processes.” This new attitude toward offenders like financial institutions, hedge funds, and brokers stems from public and media demands to hold wrongdoers publically accountable in the wake of the financial crisis. In September of last year, the agency required J.P. Morgan Chase & Co. to admit violations of securities laws as part of a $200 million settlement, confirming White’s mandate that SEC settlements “have teeth and send a strong message of deterrence.”

Fear of Criminal and Professional Consequences May Encourage Wrongdoers to Litigate Rather Than Settle
The new policy requiring admissions necessarily requires the SEC to be more willing to litigate cases involving financial-market violators. As faulty entities and individuals contemplate SEC settlement negotiations, considerations of the lasting impact an admission of guilt may have could encourage more defendants to take their cases to trial. Since admissions of guilt could lead to criminal charges brought by the Department of Justice, defendants may determine that the risk of criminal prosecution outweighs that of a loss in a civil trial, since a civil verdict is established “by a preponderance of the evidence,” as opposed to the higher, “beyond all reasonable doubt” standard in a criminal action. In addition to considerations of criminal implications, admissions of guilt could lead to substantial professional consequences, such as loss of licensure, impairment of business opportunities, and fines. In light of the real dangers that defendants will face, it will be interesting to see whether the new protocol for requiring admissions will lead to a decrease in SEC settlements this year.
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