A previous post (here) discussed the SEC’s long-standing practice of allowing defendants to settle enforcement actions “without admitting or denying” the SEC’s allegations.
It was noted that the SEC practice is not an FCPA specific issue, but it’s certainly an FCPA enforcement issue.
The previous post also discussed (as does “The Facade of FCPA Enforcement” – here) the SEC v. Bank of America case in which U.S. District Court Judge Jed Rakoff described the resolution as a “facade of enforcement.” Although not an FCPA case, the party’s briefs provide valuable insight into the same SEC enforcement procedures used in FCPA enforcement actions and the motivations of settling parties in a government enforcement action. Even the SEC noted in that case that “the terms of a reasonable settlement do not necessarily reflect the triumph of one party’s position over the other.”
The SEC’s “without admitting or denying” policy ran into Judge Rakoff again in a recent opinion and order (here) in SEC v. Vitesse Semiconducter Corp.
It is a must read for any SEC enforcement attorney, including FCPA attorneys.
Like a typical SEC FCPA enforcement action, in December 2010 (see here), the SEC filed a civil complaint against Vitesse (and others) and announced the same day that the enforcement action was settled.
Like a typical SEC FCPA enforcement action, Vitesse and the other defendants “without admitting or denying” the SEC’s allegations consented to entry of a final judgment permanently enjoining future securities law violations and ordering them to pay a civil penalties and disgorgement.
The opinion begins as follows.
“Pending before the Court is the joint proposal of plaintiff Securities and Exchange Commission (“S.E.C.”) and three of the five defendants – Vitesse Semiconductor Corporation (“Vitesse”), Yatin D. Mody, and Nicole R. Kaplan – to approve Consent Judgments that would resolve the case as to these defendants. The proposal raises difficult questions of whether the S.E.C.’s practice of accepting settlements in which the defendants neither admit nor deny the S.E.C.’s allegations meets the standards necessary for approval by a district court.”
Judge Rakoff then noted.
“Simultaneous with filing the Complaint on December 10, 2010, the S.E.C. – confident that the courts in this judicial district were no more than rubber stamps – filed proposed Consent Judgments against Vitesse, Mody, and Kaplan without so much as a word of explanation as to why the Court should approve these Consent Judgments or how the Consent Judgments met the legal standards the Court is required to apply before granting such approval.”
Judge Rakoff did find the financial and injunctive terms of the settlements “to be fair, reasonable, adequate, and in the public interest” but this issue was not the focus of his opinion.
Rather, Judge Rakoff launched into a discussion of the SEC’s “without admitting or denying” settlement policy.
Judge Rakoff noted.
“.. [T]here is a further aspect of the proposed Consent Judgments that is more troubling, to wit, the requested Court approval of settlements in which the defendants resolve the serious allegations of fraud brought against them “without admitting or denying the allegations of the Complaint.”
Judge Rakoff stated that, “to be sure, this is nothing new” and he sketched the history of this central feature of SEC enforcement practice.
Judge Rakoff noted that this settlement practice was “strongly desired” by defendants, but there “there were benefits for the SEC as well” including the fact that this practice has “made it easier for the SEC to obtain settlements.”
The end result of this enforcement practice, Judge Rakoff noted, “is a stew of confusion and hypocrisy unworthy of such a proud agency as the SEC.” He stated as follows.
“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 their right to deny it.” The disservice to the public inherent in such a practice is palpable.”
Judge Rakoff then stated as follows.
“… [T]he 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.”
Because two of the individual defendants “have already admitted their guilt in the parallel criminal proceedings” and because Vitesse had already paid millions in a class action settlement, Judge Rakoff noted that “the public is not left to speculate about the truth of the essential charges.”
In conclusion, Judge Rakoff stated as follows. “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.”
What would happen if a typical SEC FCPA enforcement action ever got before Judge Rakoff?