This is a welcome change, and I hope it has a real world impact:
The Securities and Exchange Commission is making a major change in how it settles some securities fraud cases, telling companies that they will no longer be allowed to say they neither admit nor deny the commission’s civil charges when, at the same time, they admit to or have been convicted of criminal violations.
The change has been under consideration for some time and could be announced soon, according to people who have been briefed on the new policy.
The S.E.C. will continue to use the “neither admit nor deny” settlement process when it alone reaches a deal with a company in a case of civil securities law violations, the people briefed on the policy said. Those types of cases make up the majority of its settlements.
The S.E.C. has been sharply criticized, in federal court and on Capitol Hill, for allowing companies to repeatedly settle fraud cases without admitting or denying the charges. That policy has been allowed to continue in cases even when a company admits the same conduct to another government agency, often the Justice Department.
For example, the S.E.C. and the Justice Department announced on the same day last month that Wachovia bank would pay $148 million to settle charges that the bank reaped millions of dollars in profits by rigging bids in the municipal securities market, one of several such settlements announced last year by the two agencies.
In the Justice Department settlement, Wachovia said it “admits, acknowledges and accepts responsibility for” manipulating the bidding process in the sale of derivatives on tax-exempt bonds to institutional investors like cities, hospitals and pension plans over a six-year period ending in 2004.
Anyone think this will matter?
Phil Perspective
Baby steps!!
feebog
No. It will matter when some of these crooks to jail time.
David Hunt
I haven’t been following this, but a good indicator would be how hard the industry was fighting against this ruling.
fasteddie9318
I’m sure when the fuckers who run those companies get together at their periodic meetings of the Ignorant Tight-Ass Club, they’ll be able to add this toothless policy change to their list of horrible grievances with respect to how they’ve all been badly persecuted by society. Other than that, no, no difference.
ornery_curmudgeon
If it opens up discovery it could have an impact.
This is also a sign that there is turbulence in the halls of Big Money … MF Global whacked a few toes.
Comrade Dread
Probably won’t matter.
I’m anxiously waiting to see what the newly appointed head of the CFPB does.
No doubt, so is Wall St. who will likely file a lawsuit challenging his appointment with the most sympathetic Randian Federal judge they can find once (or if) he actually starts to do things that make them squirm.
The Moar You Know
Are you kidding? If it’s for real, complete gamechanger.
I frankly wish the same principle could be applied to all civil court cases. Allowing someone with deep pockets to bury public knowledge of proven malfeasance destroys democracy.
MikeJ
@Comrade Dread: 1) they don’t have standing 2) the appointment is a political question, which the courts don’t deal with.
JasonF
It’s got big implications for civil litigation filed by private litigants (i.e. class actions by aggrieved consumers & shareholders).
The Moar You Know
Looks like the optics of the SEC’s appeal of the ruling in this case lit a fire under someone’s ass.
retr237
As a lawyer, but one without any expertise in the relevant area, I’d think it would matter. For one thing, if the company has admitted guilt to the SEC in a criminal prosecution, I’d think it would help individuals suing it civilly to prove their case, under the doctrine of res judicata (roughly translated, been there, done that; give me my judgment).
If that’s true, it would also matter in that the companies would have more of an incentive to fight the SEC instead of settling, and we might end up seeing more prosecutions as a result.
So it has the potential to change the landscape; remains to be seen if it will.
BTW, I’d suggest calling this the “Rakoff Rule,” after Judge Rakoff, who’s done the most to focus attention on this issue by rejecting such settlements.
MikeJ
@JasonF: Presumably those litigants would have brought up the admission of guilt to the DOJ or other agency. This change only matters if the scum have already admitted guilt.
No, I don’t think it will have any actual impact. That doesn’t mean it’s not a good thing though. This should still be done, I just don’t think it will make any difference.
WaterGirl
When I saw “About Damned Time”, I thought we were finally going to have a thread about the birth of BG, Jr. With photos!
But if what The Moar You Know says is right, and this is a complete game changer, then I will consider this a good thing, too. With so many good things happening, I am beginning to think of this as The Week of Having Some Hope Again.
mark k
I guess if it pisses off people like John Yoo, then I like it a lot. Its getting so ridiculous with the Republicans refusing to govern that I’m beginning to feel we should fight back with not just facts, but some well intended spite as well.
boss bitch
Of course it doesn’t matter. Whenever a problem is unexpectedly addressed by the admin/government, its time to move the goal posts.
retr237
I see that I missed the part about this applying to civil SEC prosecutions, not criminal. But RJ could, potentially, still apply, since the burden of proof is the same.
I’d also note that settlements often include provisions designed to defeat attempts to use them in other litigations, but that just becomes another bargaining chip in the negotiations. It’s still a potentially important change.
eemom
fwiw, the theory behind the defendant not having to admit liability is that it makes it easier to reach settlements and get actual compensation for victims, etc. That is not necessarily a frivolous argument – and you do have to ask what the trade-off is here. The nonadmission of liability is just standard boilerplate in any civil settlement agreement — does anyone really BELIEVE a denial of civil liability by a company that copped to criminal charges?
If there is a practical argument for this I’d be interested in hearing it, but I can’t think of one.
ETA: now I see that this only applies in cases where the defendant has already admitted criminal liability. That settles it — it’s meaningless.
Mark S.
@eemom:
Yeah, I don’t see how this is a big deal.
Mardam
It might not be a big deal, but it’s a step in the right direction. I’ll take it.
JGabriel
@David Hunt:
Maybe, maybe not. Corporations have frequently fought, vehemently, against change that have little impact on their business or bottom line.
John Cole @ Top:
It sounds like the SEC is saying, “If, while settling, you admit wrongdoing to someone else in the gov’t, then we won’t settle unless you agree to admit it to us too.”
Does that open companies up to further scrutiny or risk of prosecution by the gov’t? Does it make them less likely or more likely to admit wrongdoing? Does it make judges more or less likely to accept settlements or force the SEC to prosecute?
I really don’t know. I suspect most of us don’t. Maybe some of the lawyers here, and other people here with legal experience, could weigh in?
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Brachiator
Don’t know. I would appreciate seeing burnspesq or another attorney weigh in on the matter.
Politically, I think this will ruffle GOP feathers and increase their desire to oppose any regulatory reform offered by the Democrats.
srv
It’s not illegal if you’re [a] president.
Mardam
If it didn’t mean anything, then why do you think corporate lawyers always ask for it? If they already admitted to wrong-doing, what would be the reason to not want to admit it again? Seems to me there will be real-world consequences.
Don’t sell this short just yet.
cmorenc
The optimal time for this sort of development would have been during the first week of the new Obama Administration in January 2009. The most devastatingly critical mistake he and his Administration made was not quickly insuring that at least several trophy heads of captains-of-the-reckless-financial industry were mounted on prominent pikes of prosecution for the public to easily see, and demanding full acquiescence in major financial reforms as the prerequisite for any firm to receive so much as a dime of any TARP money. Instead, Obama misplaced trust in Geithner, who did everything he could to aid and abet those in the financial industry to escape getting the slightest damaging nick, compounded by the monstrously incorrect assumption by Obama’s political circle that the Democrats had successfully co-opted Wall Street into their corner, or at least neutralized the GOP’s hold on it.
lacp
No. It won’t.
Pococurante
To paraphrase Ron (‘Tater’) White, the SEC will have the right but they will not have the ability.
moe99
As a former SEC enforcement attorney (11 years), I don’t think it’s much of a change.
Kola Noscopy
Shocking that we see more and more of this financial enforcement-related news in the beginning of a presidential campaign season, after three years of crickets.
Why would that be?
I’m guessing the strategy is to appear to be getting tough while doing little or nothing concrete.
It will probably work.
burnspbesq
It might. Ordinarily an admission of guilt in a settlement agreement wouldn’t have collateral estoppel effect in subsequent private litigation, but corporate GCs will worry about the possibility of a judge going off the reservation, and that may make them more generous in settling the private litigation.
The other possibility is that some cases that would have settled under the old policy won’t settle under the new policy, because some CEOs will stubbornly cling to the belief that their stuff doesn’t stink. So be it.
JGabriel
@cmorenc:
Business and contract law is pretty complex, especially if there’s lots of discovery involved, and especially in New York courts. Quick prosecutions were never an option.
And, while I agree it would have been nice to see Obama’s administration pursue the banksters more aggressively straight out of the gate, they were probably more pre-occupied at the time with halting the economy’s free fall before looking for who to blame.
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burnspbesq
@mark k:
This isn’t Yoo’s area of specialty. The guy whose reaction you want to watch is Stepen Bainbridge, the Wingnut corporation law prof at UCLA.
JGabriel
eemom, moe99, burnspbesq: Thanks for weighing in. It’s good to read some views from the legal folks on this one.
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Napoleon
@moe99:
Do you think it is mostly a PR thing then?
Barry
@JGabriel: “Quick prosecutions were never an option.”
In this case, the saying ‘target-rich environment’ would hold, and the Administration would have mucho leverage in terms of bailout money.
Anonymous At Work
Gets a guilty plea on the record for fraud charges, that can be used in other civil suits.
SenyorDave
@mark k: Dead on. My gauge of Obama’s actions isn’t how the left feels about them, but how does Krauthammer, Will, etc. feel. If it pisses them off, then the White House is doing something right.
In a sane world, the media would make a big deal about the GOP trying to destroy the American government. IMO, some of these people are no better than traitors.
burnspbesq
I’d be willing to bet that if you were to look at the employment agreements of Fortune 500 CEOs ans CFOs, you would find that in the vast majority of cases, an adverse outcome in a SEC civil enforcement action would not constitute “cause” for termination, so that if the board throws them under the bus, they get to keep all their goodies. If I’m correct, then a SEC rule change that would make a real difference would be to prohibit that practice. People who have skin in the game behave differently than people who don’t.
burnspbesq
@Kola Noscopy:
“I’m guessing the strategy is to appear to be getting tough while doing little or nothing concrete”
You can guess that if you want, but the reality-based explanation is that it takes time to build successful criminal cases, and the bandwidth of the US Attorney for the Southern District of New York is not infinite.
In addition, as Matt Taibbi and others apparently don’t understand, “outrageous” and “illegal” are not synonyms. Further, even if you accept Taibbi’s view of Goldman as a criminal enterprise, being the head of a criminal enterprise, in and of itself, is not a crime. If you want Lloyd Blankfein’s head on a pike, it would be helpful to identify an actual crime that you can prove beyond a reasonable doubt.
eemom
@burnspbesq:
the board can’t throw them under the bus anyway, at least not until all litigation, criminal and civil is concluded, because (1) the corporation has to indemnify their costs of defense; and (2) they’re going to be some seriously hostile witnesses if they’ve got bus tracks on them.
orygunian
As a former investigator for a state insurance commission who was frustrated by this practice I take it as a positive if only in that the SEC can now issue press releases that say such and such company admitted to wrong doing. While it may prolong making the case I don’t think that too onerous.
dedc79
I think taking this off the table, even in the limited circumstances described, is a welcome change. This “debate” only really came to the fore because a single judge decided enough was enough. Now, the policy will be in place no matter who the corporation is, who the judge is, and who the lawyers at SEC are.
Sloegin
SEC getting companies to confess?
They must have busted out the soft cushions when the comfy chairs weren’t doing the job.
PeakVT
Jed Rakoff (Clinton appointee) is the guy to credit.
jonas
I think this could potentially be a big deal. Banks and brokerages trade (at least as they see it) on their reputations for being solid, reliable, smart and incorruptible. Having to *publicly* cop to a bunch of illegal or unethical shennanigans is an albatross no firm wants around it — both in terms of their reputation (viz. ability to attract new clients) and the potential for shareholder litigation, etc.
burnspbesq
@eemom:
(1) the Delaware Legislature could fix that.
(2) fair point.
billiecat
@burnspbesq: being the head of a criminal enterprise is not criminal? I trust you are not planning on defending any capo di tutti capos in the near future, or you might end up sleeping with the fishes.
burnspbesq
@Anonymous At Work:
Maybe. Depends on what the defendant pleads to.
For example, in criminal tax cases the object of the game for the defendant is to avoid pleading to evasion (Internal Revenue Code Section 7201), because a guilty plea for evasion collaterally estops the taxpayer from contesting the imposition of the fraud penalty in the subsequent civil tax case. In contrast, a guilty plea to willfully failing to file (Code Section 7203), filing false returns (Code Section 7206), or the general Federal false-statement crime (18 USC 1001) doesn’t have collateral estoppel effect.
billiecat
It’s a big deal for private litigants, but only in those limited cases where there is BOTH a guilty plea and a settlement. Means the settling party will be collaterally estopped from denying the allegations if they track the SEC settlement. It will be a game changer for securities actions, will also spill over into other actions if the securities violation is predicated on non-trading issues. For example, a bank that admits in an SEC settlement that it’s loan portfolio was valued at an inflated level in order to boost stock price will not be able to tell a court that it did not overvalue it’s portfolio in a suit by the buyer of securities based on that portfolio.
My guess is companies will start trying to settle with the SEC before pleading guilty to any criminal charges.
burnspbesq
@billiecat:
Care to cite to the provision in title 18 of the United States Code that makes it so?
The heads of criminal organizations go down for conspiracy, wire fraud, and tax evasion. Not for being the head of the organization.
billiecat
@burnspbesq: You are playing semantic games. The “head” of the organizations must exert some control over it, therefore, if you are the “head of a criminal enterprise” you are, ipso facto, guilty of at least conspiracy, otherwise, you cannot be the head of the organization.
Gustopher
I’d rather the SEC insist on collecting larger fines and settlements, so making $700M selling fraudulent securities costs more than $100M in fines and settlements.
Either go after a percentage of their total revenue, or start revoking corporate charters for repeated criminal acts.
But this is a baby step, I suppose.
liberal
@billiecat:
Unfortunately, no. The corporate exec can just claim he was out of the loop.
What’s needed is regulations creating accounting mechanisms whereby the people paid these absurd amounts of money can’t avoid taking responsibility. In the absense of that, it’s hard to pin them down.
Roger Moore
@burnspbesq:
I think that would be 18 U.S.C. § 1961–1968, better known to the rest of us as RICO. As I understand it, once you’ve proven they’re a corrupt organization as defined by RICO, the head is criminally responsible for anything the organization did even if he didn’t order each criminal act.
Roger Moore
@liberal:
Wasn’t that a major point of Sarbanes-Oxley? The CEO and CFO are supposed to be personally responsible for the accuracy of the statements prepared for them. They can’t claim they didn’t know what their company was doing, because they have to personally certify that there are adequate controls in place to ensure that they do know.
Rafer Janders
@burnspbesq:
Further, even if you accept Taibbi’s view of Goldman as a criminal enterprise, being the head of a criminal enterprise, in and of itself, is not a crime.
That’s just silly semantics…Goldman aside, it’s somewhat hard to be the head of a criminal enterprise without at some level engaging in conspiracy to commit criminal acts. If you’re not making decisions and ordering things get done, then you’re not the head of the organization. Can you think of even one real-world application of this somewhat novel idea?
marv
All I know for sure is this: it doesn’t change one damn thing about the last three years. That’s a stone cold fact. (sorry – that kola guy’s getting inside my head.)
Rafer Janders
@burnspbesq:
“The heads of criminal organizations go down for conspiracy, wire fraud, and tax evasion. Not for being the head of the organization.”
Again, semantics and pettifoggery. Sure, they don’t go down for having the title of head of the organization — but they go down for all the actions they take that are inextricably bound up with being the head of the organization, for all the orders they give, decisions they make, and money that gets kicked up to them.
Point is, it’s somewhat hard to be the head of a criminal organization without engaging in crimes. Because criminal organizations, by and large, don’t allow themselves to be led by schoolmarms and vicars.
trollhattan
Which GOP candidate will be the first to call this “Chicago-style thuggery” and claim it will quench job creation?
Rafer Janders
@liberal:
Post Sarbanes-Oxley, it’s much harder for a CEO to claim he was out of the loop. And thanks to email, taped calls, etc., it’s quite easy to prove who did and did not receive material information.
bjacques
I seem to remember that Bernie Ebbers, CEO of Worldcom, tried the “out of the loop” defense. It didn’t work. Maybe the judge figured those three letters after his name and the massive paychecks he cashed suggested he was paid to know what went on under his watch.
I like the “captain of the ship” doctrine, whereby he or she who gives the orders takes the rap, no matter what. Want to make sure loan officers don’t make a practice of signing up meth-heads and declaring the resulting paper to be worth gold? Have a policy and enforcement mechanism that bounces that loan officer out the door so fast his or her head will spin, because the CEO doesn’t want to go to jail.
moe99
Let’s be clear here. The SEC does not do criminal prosecutions. Only the US Atty’s office does those. So, for this to take place, there has to be either a conviction by the federal jury, or a guilty plea on the part of the corporate defendants in a criminal action brought by the US Atty first. Then the SEC can go in and get sloppy seconds. There’s not much of a change here, other than the defendant admits what’s already been shown or agreed to in the criminal case: that they violated the law. It’s simply making the SEC not use feathers to beat convicted criminal defendants.
eemom
@moe99:
right — and none of these geniuses here are focusing on the fact that the new “rule” ONLY applies where there HAS been an admission of criminal liability. In other cases — which as the post notes is MOST of the ones the SEC settles, it’s business as usual — i.e., pay the money and nobody gets hurt.
cckids
@JGabriel: @jonas: This could matter. I know that individuals who sell securities (like life insurance, REITS, or mutual funds) have to disclose to clients if they have an adverse judgement against them, such as a bankruptcy or foreclosure. Maybe if enough of this crap starts showing up on disclosure forms the companies will start acting better.
Tho, of course, the largest part of the behavior that caused the financial system’s meltdown was not illegal.
mary
I agree. Unless someone goes to jail, it’s just the cost of doing business.
em2000
moe99 nailed it. The key is that the SEC is not allowed to pursue criminal charges – only the department of justice can do this. So the SEC is essentially promising that they will make someone admit guilt only after they have already admitted guilt in a settlement with the justice department or have been found guilty of a criminal action in court. I don’t see how this changes much of anything.
Chuck Butcher
Since RICO was brought up, I wonder what would happen to RICO if the Justice Dept started using all the provisions available to it in actions against Banksters. Seizure of assets based on no more than a charge as opposed to a conviction…
In such a case, what wouldn’t be considered the proceeds of criminal activity? Since I don’t even pretend to be a lawyer, I will still note that RICO was intended for the ‘wrong’ sort of people.
DanielX
@bjacques: All too true. There has been a strange lack of prosecutions of Wall Street figures and companies who engaged in clearly criminal behavior, due to the revolving door arrangement for attorneys between Wall Street and the Justice Department. After all, who wants to ruin his or her chances of cashing in for the big bucks after doing four or five years as an AUSA or Justice staff attorney? Which is why said behavior will go on; there are no real personal consequences or cost for continuing, and the rewards for doing so are so great. In one of Matt Taibbi’s many excellent articles on this topic, one of his interviewees said something to the effect that if Lloyd Blankfein was locked up for a couple of years, and not in a Club Fed but a hard time pound’em-in-the-ass joint, all this bad behavior would come to a halt. True dat; rich people do not thrive in jail. The idea of Lloyd or his ilk having to preserve life, sanity and rectal health by throwing his arms around the biggest, baddest motherfucker in the joint and saying “honey, I’m yours” does hold a certain appeal.
And yeah, the “out of the loop” defense really doesn’t do a whole lot for you these days. Granted, there are so many state and federal criminal statutes on the books these days that it’s difficult to live life or operate a business without violating some law or other. Libertarians are not altogether wrong about this, as any violation can be used (if so desired by the powers that be) to give you a more difficult life. The IRS alone can have you peeing blood and waking up sweating for years, without ever filing criminal charges.
That being said, a CEO of a major corporation is expected to know what’s going in in his or her company and to have competent counsel and policies in place to avoid criminal behavior. When Ken Layman (anyone remember Enron?) was testifying before Congress, as I recall, several questioners made the point that if he knew about criminal behavior and didn’t stop it he was complicit himself, and if he didn’t know about it he was incompetent. In either case he wasn’t fit to be CEO. So with the various Wall Street scumbags, except that there were more of them making more money than the Enron folks ever dreamed of. Lots of money buys lots of political influence and at least semi-immunity from criminal prosecution, to point out the blindingly obvious.