SEC may pursue out-of-court deals
The Securities and Exchange Commission appears likely to pursue more cases administratively as a result of a federal judge's decision last week to reject a $285 million settlement with Citigroup Inc.
The Securities and Exchange Commission appears likely to pursue more cases administratively as a result of a federal judge’s decision last week to reject a $285 million settlement with Citigroup Inc.
In the wake of the reversal, the SEC is also asking Congress for more powers to penalize and to enforce its own deals.
U.S. District Judge Jed Rakoff in the Southern District of New York last Monday rejected the SEC’s settlement with Citigroup over a mortgage-backed investment fund.
In explaining his ruling, the judge questioned the long-standing SEC policy of allowing companies to settle claims without admitting or denying wrongdoing.
Mr. Rakoff said that a lack of admission of facts by Citigroup made it impossible for him to determine whether the proposed settlement was in the public interest. He scheduled a July trial.
It isn’t clear if the SEC will appeal the decision, pursue the case through trial or hammer out a new settlement that is palatable to the judge. But in handling future cases, lawyers said that the SEC may well try to keep more settlements in-house rather than risk consent agreements that must be approved by a federal judge.
The SEC is asking Congress for additional statutory authority to bring fines and enforce sanctions itself. On Monday after Mr. Rakoff rejected the Citigroup deal, SEC Chairman Mary Schapiro sent a letter to the head of a congressional panel on securities asking for Congress to approve additional statutory powers for the commission.
One proposed change would boost the penalties that the SEC could charge for the most serious violations from $150,000 to $1 million per offense for individuals and from $725,000 to $10 million for entities. Another change would be in the calculation of “gross pecuniary gain” and would eliminate the disparity between the penalty relief available in the district court and through administrative proceedings, the SEC said.
The SEC also asked to be able to calculate a penalty based on “investor losses” rather than having to focus on taking back an amount equal to the swindler’s ill-gotten gains.
In addition, the SEC wants to be able to charge monetary penalties “over and above” the base amounts if someone has had a judgment or conviction against him or her in the previous five years. Finally, the SEC asked for enhancements to its ability to penalize someone who violates a federal court injunction or bar that has been imposed by the commission.
One difference with a court-approved deal is that parties who break it can be held in contempt of court, said Steve Thel, professor at Fordham University Law School.
Parties are more likely to comply with a court injunction than a contract, he said.
The additional statutory authority for which the SEC is asking Congress could give the commission more teeth in its administrative cases.
The proposed statutory changes “would substantially enhance the effectiveness of the commission’s enforcement program by addressing existing limitations that resulted in criticism regarding the adequacy of commission actions against those who violate the securities laws,” Ms. Schapiro wrote in the letter to Rep. Jack Reed, R-R.I.
STRONGER HAND
If granted, the powers would strengthen the SEC’s hand in administrative cases, said Stephen Crimmins, a partner at K&L Gates LLP and former deputy chief litigation counsel in the agency’s enforcement division. “If they pursue settlements as an administrative proceeding, those just have to be approved by the commissioners,” he said.
SEC spokesman John Nester declined to comment about whether the SEC will pursue additional administrative resolutions.
SEC enforcement director Robert Khuzami said that the current settlement provisions, which allow a firm to “neither admit nor deny” allegations, allow the commission to extract disgorgement, monetary penalties and business reforms from firms without the risk, resources and time involved in pursuing litigation.
“We will continue to review the court’s ruling and take those steps that best serve the interests of investors,” he said in a statement.
The SEC may expand its use of the administrative forum for smaller cases, such as those against investment advisers, said Tom Gorman, a partner at Dorsey & Whitney LLP. But he expects that the SEC will continue to seek injunctions through the courts for large market manipulation cases.
The SEC has 60 days to appeal Mr. Rakoff’s decision, but securities lawyers said that they don’t think the commission will do so, because it risks losing on appeal. Then the government’s long-standing approach to settlements that allows firms to skirt the admission of guilt would be up in the air.
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