There has been much discussion recently of the merit of the SEC's no-admit settlement policy. Companies and individuals routinely enter into enforcement settlements with the SEC that include a detailed rendition of the facts as the SEC sees them and a disclaimer that the company or individual is settling without admitting or denying the allegations. The practice has allowed the SEC to be very sloppy in constructing its enforcement actions.
When Judge Rakoff was asked to approve a 2011 settlement agreement between Citigroup and the SEC, he objected to being asked to do so on the basis of facts that had neither been agreed to by Citigroup nor proven at trial:
The injunctive power of the judiciary is not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts--cold, hard, solid facts, established either by admissions or by trials--it serves no lawful or moral purpose and is simply an engine of oppression.
He went on to explain that the "S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges . . . ."
The no-admit settlement policy too often ensures that the truth does not emerge, and the SEC likes it that way. A former SEC attorney explained the utility of settlements in a letter last week in response to a Wall Street Journal opinion piece on the subject:
Parties in SEC cases, as with all legal disputes, settle for many reasons wholly unrelated to actual liability. The SEC staff often threatens to file cases even when its position isn't as strong as the agency might like. Some of those cases settle anyway, giving the SEC opportunities to further its programmatic agenda and send messages about appropriate or inappropriate conduct.
Utility is not enough to justify the SEC's settlement policy. Agencies are supposed to pursue wrongdoers (of which there are plenty), not railroad innocent parties into serving as convenient scapegoats in a messaging campaign.
Any review of the merits of the no-admit policy also would require a reconsideration of the parameters within which the SEC is permitted to bring internal administrative proceedings rather than civil actions. The SEC, by successfully persuading Congress to broaden those parameters in Dodd-Frank, has further limited the possibility of uncomfortable interactions of the type it has had with Judge Rakoff. Making changes to ensure that the SEC can stand behind its enforcement actions may cause some discomfort, but will bolster the agency's credibility.
As Judge Rakoff emphasized, the SEC is on a mission to uncover truth. A policy that allows it to fabricate its own truths in order to serve objectives unrelated to the matter at hand is one that warrants revisiting.