October 19, 2021

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SEC To Seek Companies & Individuals To Admit Wrongdoing In Enforcement Actions

According to the SEC’s announcement, it’s going back to an Obama-era policy that was largely abandoned under the Trump administration.

In the past, the SEC has allowed companies and individuals to settle enforcement probes without admitting or denying the agency’s allegations, which has led some liberal critics to question the effectiveness of the agency’s enforcement efforts.

Gurbir Grewal, the SEC’s enforcement chief, believes that requiring admissions in some cases will increase the deterrent value of enforcement actions while also increasing public confidence in financial and government institutions.

Mr. Grewal stated at the Practicing Law Institute’s annual SEC conference:

“When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law.”

It also serves as a clarion call to other market participants to stamp out and self-report misconduct, if it occurs in their firm, given the attention-getting nature of admissions, he said.

The SEC’s renewed focus on admissions demonstrates Chairman Gary Gensler’s efforts to give the enforcement program a more aggressive tone.

It’s been said that the civil oversight model of the SEC’s allows companies and individuals to simply pay fines and move on from trouble.

The Justice Department has the authority to enforce securities laws with criminal penalties if the SEC receives referrals of fraud cases, the most serious type of allegation it investigates.

Businesses may oppose the SEC’s implementation of the new policy. Admitting facts that are against the law has the potential to have negative repercussions for businesses.

Acknowledgments in SEC cases, for example, could help private lawsuits brought by investors or other parties who were harmed by alleged corporate misconduct.

For this reason, plaintiffs and their lawyers should be able to use SEC confessions as evidence in securities class action lawsuits.

Companies and individuals will be forced to admit wrongdoing as a condition of settling civil charges by the SEC, which was announced in 2013.

The SEC was under fire at the time for failing to detect shady practices in the mortgage-bond and derivatives markets that contributed to the 2008 financial crisis and prove it could rein in Wall Street abuses.

The strategy was proposed by Mary Jo White, the SEC’s new CEO, a former federal prosecutor.

A federal judge in Manhattan, Jed Rakoff, also embarrassed the agency when he initially rejected a 2009 settlement with Bank of America Corp., saying it “did not comport with the most elementary notions of justice and morality.”

As a result of the SEC and Bank of America increasing the monetary sanctions from $33 to $150 million, he eventually approved the agreement.

Few settlements included admissions of wrongdoing under Ms. White’s leadership.

A professor at the Northern Illinois University College of Law found that only 2% of the 2,063 cases he studied from 2014 to 2017 involved admissions.

A study published in the Iowa Law Review found that only 22 companies had admitted fault in fraud cases, the most serious statutory infraction the SEC can enforce.

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  • SEC Chairman Mary Jo White Testifies Before The House Financial Services Committee: Pete Marovich/Bloomberg via Getty Images
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