Skip to content
Wall Street, companies may have to drop more to settle with the SEC

WASHINGTON — Wall Street regulators said Wednesday they plan to require companies to admit wrongdoing in certain cases when settling civil lawsuits.

The announcement is a return to a policy started under the Obama administration that the Securities and Exchange Commission largely abandoned under the Trump administration. The SEC has historically allowed businesses and individuals to settle enforcement investigations without admitting or denying the agency’s allegations, a practice that has led some liberal critics to question the value of its policing efforts. The politics of the Obama era resulted in few regulations involving confessions of wrongdoing.

Requiring admissions in some cases will improve the deterrent value of enforcement actions and build public confidence in financial and government institutions, SEC chief enforcement officer Gurbir Grewal said.

“When it comes to liability, few things compare with the scale of criminals admitting to breaking the law,” Grewal said at an annual SEC conference sponsored by the Practicing Law Institute. “Admissions, given their attention-grabbing nature, also serve as a bugle call to other market participants to root out and report misconduct themselves, to the extent that it occurs in their business,” said he declared.

The return to admissions research shows how the SEC, led by new chairman Gary Gensler, is trying to tone its enforcement agenda harder. A knock on the SEC’s civilian oversight model is that it allows businesses and individuals to get out of trouble by simply paying fines, which often come out of the pockets of shareholders. The SEC can refer cases of fraud – the most serious type of allegation it investigates – to the Department of Justice, which can enforce securities laws using criminal penalties.

The SEC may encounter resistance from companies in implementing the new policy. Admitting facts that violate the law can have collateral consequences for businesses.

Admissions into SEC business, for example, would give a boost to private litigation filed by investors or other parties aggrieved by alleged corporate wrongdoing. Many securities laws can be enforced privately, so plaintiffs and their lawyers would benefit from being able to cite confessions that companies have made to the SEC.

The SEC announced in 2013 that it would require businesses and individuals to admit wrongdoing as a condition of settling civil charges in some cases. The SEC was under pressure at the time to show it could curb Wall Street abuse, failing to detect shady practices in the mortgage bond and derivatives markets that contributed to the financial crisis of 2008. Mary Jo White, a former federal prosecutor who took over the SEC in 2013, proposed the strategy.

The agency was also embarrassed by Manhattan federal judge Jed Rakoff, who initially rejected a 2009 settlement with Bank of America. Corp.

which he said did not “conform to the most basic notions of justice and morality”. He then approved the deal after the SEC and Bank of America increased monetary penalties from $ 33 million to $ 150 million.

According to research by David Rosenfeld, a professor at Northern Illinois University College of Law, only about 2% of the 2,063 cases filed from 2014 to 2017 were for admissions. According to Mr. Rosenfeld’s article, published in the Iowa Law Review, only 22 entities admitted their fault in fraud cases, the most serious violation of the law the SEC can enforce.

Sanjay Wadhwa, deputy director of the enforcement division, told Wednesday’s conference that regulators would seek admissions “in cases involving serious misconduct” and where large numbers of investors have been harmed or where defendants hampered the SEC’s investigation.

Mr Grewal said his division, which has a budget of nearly $ 600 million and more than 1,300 employees, also plans to take a close look at when it should seek to ban individual defendants from serve in the future as officers or directors of public companies. This ban is one of the most severe penalties a court can impose on those accused of violating investor protection laws.

“The decline in public confidence in our institutions is real and it hurts everyone,” he said.

Write to Dave Michaels at

Copyright © 2021 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8