“Neither Admit nor Deny” Settlements at the SEC

Posted on March 27, 2014, by Mary P. Hansen in Admissions, Neither Admit Nor Deny, SEC Guidance, Settlements. Comments Off on “Neither Admit nor Deny” Settlements at the SEC

In January 2012, the SEC announced that it would vary from its well-established practice of settling with defendants and respondents on a neither admit nor deny basis.  The change has affected only matters in which defendants were resolving parallel criminal proceedings—i.e., guilty pleas, non-prosecution agreements, and deferred-prosecution agreements—in which they are required to “admit” their misconduct. The announcement came after a number of courts criticized the staff for allowing defendants to settle without admitting or denying soon after making plea allocutions in which they expressly admitted to the same conduct. Although some observers thought it did not go far enough, the policy has generally been met with little controversy and has received even less attention.

On June 18, 2013, SEC Chair Mary Jo White announced an expansion of the “admit” policy, and explained that while “neither admit nor deny” settlements would remain the norm, the SEC would now require defendants to admit wrongdoing “in certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate,” even if that means the SEC will have to litigate rather than achieve a “prompt” resolution. The then SEC coenforcement chiefs, Andrew Ceresney and George Canellos, added that defendants may be required to admit violations in cases of “egregious misconduct,” such as cases involving obstruction of the SEC’s investigation or harm to large numbers of investors.

The Chair’s and coenforcement chiefs’ statements received significant coverage, which led to a barrage of articles opining about exactly which cases the SEC would choose to implement its new “admit” policy for; expressing skepticism about whether such a policy could be implemented, given the SEC’s limited resources to litigate cases; musing that the policy was announced simply to appease the SEC’s critics in Congress and among federal judges; and discussing how such settlements could be used by the plaintiffs’ bar in related civil matters.

In less than a year since Chair White announced the expanded policy, the SEC has secured seven “admit” settlements. Five of these settlements did not involve parallel criminal proceedings, and three of these settlements did not involve fraud. While the parameters and collateral consequences of the SEC settlement policy still are not clear, the seven “admit” settlements demonstrate that the policy may be flexible enough to allow settling parties to negotiate the particular charges and the scope and nature of the required admissions. This flexibility gives settling parties an opportunity to continue to resolve matters prior to litigation, as well as to mitigate the collateral consequences of the SEC settlement.

In the first “admit” settlement, the SEC seemed willing to forego certain standard relief in return for admissions. As part of the settlement, Harbinger Capital Partners and Philip Falcone admitted certain facts contained in an annex to a consent attached to the final judgment. They did not admit that their conduct violated the federal securities laws, but they did admit that they acted “recklessly.” The SEC takes the position that “recklessness” is sufficient to prove a fraud violation under Section 10(b) of the Securities Exchange Act of 1934. While the SEC obtained some admissions, the SEC did not obtain its usually standard injunctive relief against Harbinger or Falcone.

Notably, in three of the seven “admit” settlements the SEC charged non-fraud-based violations, including failure to have adequate internal controls, failure to keep records properly, and failure to register properly with the SEC as an investment adviser. Non-fraud-based violations do not require a showing of intent, or even negligence, and there is no private right of action to bring internal control violation claims.

Collateral Consequences

One of the most-often cited concerns about admit settlements is the possibility that they may have collateral consequences in related private civil litigation. For example, it is reasonable to believe that plaintiffs will seek to use the “admit” settlements offensively to argue collateral estoppel in related civil cases. In Parklane Hosiery v. Shore, 439 U.S. 322 (1979), the Supreme Court allowed plaintiffs in a proxy fraud class action to assert collateral estoppel on the basis of a declaratory judgment secured by the SEC after a trial. Importantly, the Court noted that collateral estoppel is appropriate when “the party against whom estoppel is asserted has litigated questions of fact and has had the facts determined against him in an earlier proceeding.” Id. at 335 (emphasis added). Under this reasoning, it would appear plaintiffs’ efforts to use SEC settlements to argue collateral estoppel would fail in light of the fact that settlements achieved in advance of trial are not the result of a full adjudication of facts. Nevertheless, there is a real potential of having to litigate the issue of collateral estoppel after having entered into an “admit” settlement with the SEC.

Plaintiffs also may seek to introduce into evidence the express “findings” or “admissions” in the SEC’s settlement agreement. While Federal Rule of Evidence 408 (“Compromise Offers and Negotiations”) prevents the admission of certain settlement-related evidence “to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or an admission,” whether a particular plaintiff is able to introduce “findings” or “admissions” in the SEC’s settlement agreement will depend upon the plaintiff’s stated purpose and then only after a fact-intensive review by the court.

There is precedent, both in the Second Circuit and elsewhere, for finding that the broader policy that seeks to encourage settlement by barring admissions made in the context of settlement negotiations also applies to completed settlement agreements. See, e.g., Alpex Computer Corp. v. Nintendo Co., 770 F. Supp. 161, 166-67 (S.D.N.Y. 1991). It would seem that strong public policy interest would also protect SEC settlements.  There may be some risk, however, for defendants entering into “admit” settlements. For example, Rule 408 expressly allows federal prosecutors to use SEC settlements in later criminal prosecutions. It does not appear that any court has ruled, in the context of a private civil action, whether regulatory settlements fall within the protection of Rule 408.

Finally, even if plaintiffs cannot successfully introduce settlements as admissions, it is likely that plaintiffs will include any specific admissions made in connection with SEC settlements in complaints and in briefs in opposition to motions to dismiss.


It is important to note that, although the SEC has started to obtain “admit” settlements, most of those cases were high profile, affected a large number of investors and, in at least two instances, drew the attention of federal criminal authorities. Since June 2013, the SEC has routinely entered into “neither admit nor deny” settlements with defendants. See, e.g., In re John A. Stadler, Sec. Ex. Rel. 7187 (Mar. 11, 2014) (finding AgFeed’s former chairman and interim CEO violated the federal securities laws in connection with an accounting fraud and accepting an offer of settlement that did not require him to admit any findings); In re Pub. Health Trust of Miami-Dade Cnty., Fla., Sec. Act Rel. 9450 (Sept. 13, 2013) (announcing “neither admit nor deny” settlement finding that respondent made misrepresentations in bond-offering documents). Moreover, at least one senior SEC official has recently reiterated that “admit” settlements will be the exception, not the norm.  Brian Mahoney, Admissions of Guilt Won’t Become Norm, SEC Official Says, Law360 (March 13, 2014).

Over time, it should become clearer when the SEC will seek admissions in connection with settlements. Even where the SEC is insisting on admissions, however, it appears there is still room to negotiate the facts that will be admitted, the venue in which the action will be filed—i.e., an administrative proceeding or in federal court—and the specific violations that will be charged. Successful negotiation of these issues may provide a defendant with important advantages, not only in the SEC action, but also to preserve factual and legal arguments in related private civil actions.

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