Understanding Recent Changes To The SEC's 'Neither Admit Nor Deny' Settlement Policy

The Securities and Exchange Commission (the "SEC") has for decades incentivized defendants to resolve enforcement charges by allowing them to settle without admitting liability, subject to the condition that they also not publicly deny it. This "neither admit nor deny" policy, which makes settlements more palatable for defendants, has been considered by the SEC to be necessary for efficiency and productivity. However, the policy has recently come under public scrutiny.

On January 6, 2012, SEC Enforcement Director Robert Khuzami announced a change to the policy in cases involving defendants who have been convicted in parallel criminal cases or who have admitted or acknowledged criminal conduct in non-prosecution or deferred prosecution agreements with criminal prosecutors (NPAs/DPAs).1 In such cases, the SEC will delete the "neither admit nor deny" language from its settlement documents, recite the fact and nature of the criminal conviction or NPA/DPA in those documents, and give the SEC staff discretion to incorporate into them any relevant facts admitted during the plea allocution or set out in a jury verdict form or the NPA/DPA.2 The new policy retains the SEC's prohibition on denying the SEC's allegations or making statements suggesting that the allegations are without a factual basis.3

This policy change does not affect the SEC's "neither admit nor deny" settlement approach in cases without a parallel criminal resolution.4 The vast majority of SEC cases fit into that unchanged category, including the recently-filed Citigroup case in which US District Judge Jed Rakoff highlighted the "neither admit nor deny" language for a public not ordinarily interested in the intricacies of SEC enforcement policy.

The SEC's Historical Approach and Judge Rakoff's Recent Decisions

The SEC's policy of allowing settlements to specify that the defendant neither admits nor denies wrongdoing was implemented in 1972. The SEC explained that a defendant's refusal to "admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations" (emphasis added).5 The SEC therefore will not allow silence that it views as an implicit denial, and defendants have every incentive to resist making affirmative admissions that may be used against them in parallel private litigation.6 As a result, SEC settlements typically include the "neither admit nor deny" language, which serves to satisfy both the SEC's insistence that its allegations not be disavowed and also defendants' desire to argue in subsequent litigation that they are not bound by admissions.

While the SEC can settle administrative actions brought internally without review by an administrative law judge, it must obtain a federal judge's approval to settle an action brought in district court. Most district court judges will sign the proposed final judgments in SEC cases without significant scrutiny, but Judge Jed Rakoff of the Southern District of New York has refused to do so in a string of recent opinions. Instead, he has criticized the "neither admit nor deny" language and created public debate about whether the SEC's policy allows defendants to avoid accepting responsibility for their conduct.

First, in 2009, in SEC v. Bank of America Corp., Judge Rakoff required the SEC and the Bank to justify a proposed "neither admit nor deny" settlement that called for an injunction against future violations and a penalty of $33 million for alleged misstatements related to the bank's acquisition of Merrill Lynch.7 Judge Rakoff took issue with several aspects of the settlement, including that Bank of America neither admitted nor denied liability while at the same time arguing in submissions to the court that its conduct was actually lawful.8 Judge Rakoff rejected the proposed settlement, in part because the Bank, having not admitted the allegations and having taken the position that its conduct was lawful, "would feel free to issue exactly the same kind of proxy statement in the future."9 He concluded that injunctive relief forbidding future false or misleading statements would therefore "be...