SEC alters method of detailing cases
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The Securities and Exchange Commission is tweaking its widely used practice of allowing scofflaws to settle civil charges brought by the agency without admitting or denying they did anything wrong.
SEC Enforcement Director Robert Khuzami announced Jan. 6 that in cases involving defendants who admit to or are convicted of wrongdoing in a criminal case, the agency will no longer say the defendants "neither admit nor deny" the allegations when they settle related civil charges.
The change will apply to a minority of the cases the SEC brings. The agency turns criminal matters over to the U.S. Department of Justice, as is evident from stepped-up enforcement of insider trading and other securities laws.
The policy revision comes a month after a federal judge said the practice is "hallowed by history, but not by reason."
In a statement, Mr. Khuzami said the change will eliminate the inconsistency of a defendant admitting to or being convicted of criminal conduct, yet neither admitting nor denying misbehavior resulting in civil charges stemming from the same conduct.
As absurd as that sounds, it happens more often than you might think.
Last month, federal prosecutors agreed not to criminally charge Wachovia Bank over rigging bids and manipulating municipal securities transactions in 25 states and Puerto Rico. Wachovia agreed to pay $148 million in restitution, penalties and other charges. As part of the non-prosecution agreement, Wachovia acknowledged and accepted responsibility for the conduct in question.
The same day, Wachovia settled civil charges brought by the SEC over the same conduct. Yet, as part of that settlement, Wachovia neither admitted nor denied doing what the agency accused it of doing.
In November, a former U.S. Food and Drug Administration chemist settled civil insider trading charges brought by the SEC without admitting or deny that he had used confidential information from the FDA to generate $3.8 million in profits from trading the stocks of companies that had drugs before the agency.
A month earlier, the chemist pled guilty to criminal charges that accused him of doing the same thing.
As part of the new policy, the SEC will delete the "neither admit nor deny" language from settlements when there is a criminal conviction, a guilty plea or the Justice Department reaches a non-prosecution agreement as it did in the Wachovia case. The SEC settlement will lay out what happened in the criminal case and give the SEC discretion to use other relevant facts that emerged from the trial.
The new policy will not apply to the SEC case that inspired U.S. District Court Judge Jed S. Rakoff's comment on the absurdity of the "neither admit nor deny" provision.
In that case, Judge Rakoff balked at the SEC's proposed $285 million settlement with Citigroup, which stemmed from the investment firm's sale of about $1 billion in dubious mortgage-backed securities. He wanted more information about what Citigroup did before becoming "a mere handmaiden to a settlement privately negotiated on the basis of unknown facts."
No criminal charges have been brought against Citigroup in the case.
The SEC is appealing Judge Rakoff's decision.
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Evidence from the Great Recession and its more virulent ancestor suggest that extended periods of income inequality -- think the 99 percent vs. the 1 percent -- help foment financial crises.
That's the conclusion of a report circulated this month by the New America Foundation, a think tank based in Washington, D.C. Its chairman is Eric Schmidt, Google's executive chairman and former CEO.
The report is co-authored by Anant Thaker of Boston Consulting Group and Elizabeth Williamson of Frontenac Co., a Chicago private equity firm.
They conclude income inequality generates instability in the financial system because it: prompts lower- and middle-income earners to take on unsustainable debt in order to maintain or increase their living standards; creates large pots of money among the high-income class that encourage the proliferation of hedge funds, mortgage-backed securities and other sophisticated investments; and increases the clout of the financial sector, enabling it to successfully lobby for less regulation, which allows it to take on more risk.
All three factors were evident during the periods leading up to the Great Depression and Great Recession, the report states.
"In isolation, each of these factors may have little impact on systemic crisis, but collectively, they can reinforce each other," the authors wrote. "The end results are extremely fragile economic conditions."
First Published January 15, 2012 12:00 am
