SEC and Settlements: How a Recent Federal Ruling May Change the Status Quo

The Securities and Exchange Commission (SEC) is the federal agency which has the responsibility of enforcing federal securities laws and regulating the stock and option exchanges and other electronic securities markets in the United States.  The SEC has the authority by Congress to bring civil enforcement actions against individuals or companies alleged to have committed accounting fraud, providing false information, engaging in insider trading and violating other securities laws.   When violations include a criminal component, the SEC also works with criminal law enforcement agencies to prosecute individuals charged with this type of white collar crime.

When the violation is civil in nature, the SEC often settles with the company or individual for a specified monetary amount.  In these cases, the SEC recommends a settlement amount and then submits the same to a federal judge for approval.  The settlement must be approved by a federal judge in order to be finalized.

While these settlements are generally approved by the federal courts even when the violating party neither admits nor denies wrongdoing, the tides may be turning.  On November 28, 2011, a federal judge sitting on the U.S. District Court in Manhattan blocked a settlement between Citigroup and the SEC .   The judge blocked the settlement because he stated that without an admission by Citigroup or proof of its wrongdoing by the SEC, he could not determine whether the agency’s settlement with Citigroup was “fair, reasonable, adequate and in the public interest.”  Under Federal law, this determination is required for the court to approve a settlement of this kind.

Most settlements that the SEC makes with major companies are of the sort where the company neither admits nor denies wrongdoing.  This type of settlement allows the SEC to avoid costly litigation with companies as well as insulated companies from using an admission of wrongdoing in later suits by investors.  By his ruling, the judge has essentially said that this provision is not allowable – at least in his court.

What does this mean going forward?  Time will tell.  Some believe that this ruling may eventually block the SEC from settling all cases that the defendant does not admit the charges.  Others believe that Citigroup represents a unique case as it is a company that has been noted to be a repeat offender by both the SEC and the court.

Attorney Edwards has represented numerous clients accused of white collar crime – such as securities fraud.  If you are facing this type of charge and have questions, contact us.

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