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  • Writer's pictureKirk Hartley

Judge Rakoff Takes the SEC To Task On Pleas that Neither Admit Nor Deny Guilt

You have to love Judge Rakoff’s willingness to ask hard questions and make comments about public policy. His current questions and comments – highlighted by this Dealbook article – are related in this new opinion. The question he posed goes to the SEC practice of allowing defendants to settle claims “without admitting or denying wrongdoing.”

Judge Rakoff’s comments and history lesson are set out below, and are well worth considering. In fact, why does our government let crooks deny being crooks ?

"Actually, the history of the practice is a bit more complicated than the S.E.C.’s footnote suggests. See Tr. 12/22/10 at9. Long before 1972, the S.E.C. had already begun entering into consent decrees in which the defendants neither admitted nor denied the allegations. This was strongly desired by the defendants because it meant that their agreement to the S.E.C.’s settlements would not have collateral estoppel consequences for parallel private civil actions, in which the defendants frequently faced potential monetary judgments far greater than anything the S.E.C. was likely to impose. But there were benefits for the S.E.C. as well. First, the practicemade it much easier for the S.E.C. to obtain settlements. And second, at a time (prior to 1972) when the S.E.C.’s enforcement powers were largely limited to obtaining injunctive relief, the S.E.C.’s focus was somewhat more centered on helping to curb future misconduct by obtaining access to the Court’s contempt powers than on obtaining admissions to prior misconduct.

But, by 1972, it had become obvious that as soon as courts had signed off on such settlements, the defendants would start public campaigns denying that they had ever done what the S.E.C. had accused them of doing and claiming, instead, that they had simply entered into the settlements to avoid protracted litigation with a powerful administrative agency. Thus, the real change effected by the 1972 was the requirement that a defendant who agreed to a consent judgment “without admitting or denying the allegations of the Complaint” nevertheless agree that the defendant would not thereafter publicly deny the allegations. To this end, each of the proposed Consent Judgments now presented to this Court is accompanied by a formal written “Consent” of the defendant agreeing, pursuant to 17C.F.R § 205.5, “not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis.”

The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C. The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them either(though, as one would expect, his supporters feel no such compunction). Only one thing is left certain: the public will never know whether the S.E.C.’s charges are true, at least not in a way that they can take as established by these proceedings.

This might be defensible if all that were involved was a private dispute between private parties. But here an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging the right to deny it.”

The disservice to the public inherent in such a practice is palpable. Confronted with the same choice, the United States Department of Justice has long since rejected allowing defendants, except in the very most unusual circumstances, to enter into pleas of nolo contendere, by which a defendant accepts a guilty plea to a criminal charge without admitting or denying the allegations. See U.S. Dep’t of Justice, U.S. Attorneys’ Manual § 9-16.010 (2008)(“United States Attorneys may not consent to a plea of nolo contendere except in the most unusual circumstances and only after a recommendation for doing so has been approved by the Assistant Attorney General responsible for the subject matter or by the Associate Attorney General, Deputy Attorney General or the Attorney General.”); U.S. Dep’t of Justice, U.S. Attorneys’ Manual § 9-27.500(2006) (“The attorney for the government should oppose the acceptance of a plea of nolo contendere unless the Assistant Attorney General with supervisory responsibility over the subject matter concludes that the circumstances of the case are so unusual that acceptance of such a plea would be in the public interest.”). As the great U.S. Attorney General Herbert Brownell, Jr. stated in a 1953 departmental directive:[A] person permitted to plead nolo contendere admits his guilt for the purpose of imposing punishment for his acts and yet, for all other purposes, and as far as the public is concerned, persists in his denial of wrongdoing. It is no wonder that the public regards consent to such a plea by the Government as an admission that it has only a technical case at most and that the whole proceeding was just a fiasco .See Comment, U.S. Dep’t of Justice, U.S. Attorneys’ Manual § 9-27.500(2006).

Moreover, as a practical matter, it appears that defendants who enter into consent judgments where they formally state, with the S.E.C.’s full consent, that they neither admit nor deny the allegations of the complaint, thereafter have no difficulty getting the word out that they are still denying the allegations, notwithstanding their agreement not to “make any public statement” denying the allegations. Reacting to the equivocal press releases issued by some defendants after such settlements, S.E.C. Commissioner Luis A. Aguilar recently expressed the “hope that this revisionist history in press releases will be a relic of the past,” but added “If not, it may be worth revisiting the Commission’s practice of routinely accepting settlements from defendants who agree to sanctions ‘without admitting or denying’ the misconduct.” See Commissioner Luis A. Aguilar, Speech by SEC Commissioner: Setting Forth Aspirations for2011, Address to Practising Law Institute’s SEC Speaks in 2011 (Feb.4, 2011).

For now, however, the S.E.C.’s practice of permitting defendants to neither admit nor deny the charges against them remains pervasive, presumably for no better reason than that it makes the settling of cases easier. Although this Court must give substantial deference to the Commission’s views, even if only embodied in a practice rather than in a fully articulated policy, the Court is ultimately obliged to determine whether such a practice renders any given proposed Consent Judgment so unreasonable or contrary to the public interest as to warrant its disapproval.


Under these unusual circumstances – but reserving for the future substantial questions of whether the Court can approve other settlements that involve the practice of “neither admitting nor denying” – the Court approves the proposed Consent Judgments."

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