Lookout for the SEC: After First Demanding More Admissions, the SEC is Additionally Increasing Monetary Penalties and Giving Advice to Defense Counsel

After first announcing a change on June 18 of this year to demand more admissions in SEC actions, an SEC leader recently made further comments echoing that same sentiment, as well as referencing the SEC’s intended use of stiffer monetary penalties.  On October 1, at a Practising Law Institute conference, SEC Enforcement Division Co-Director Andrew Ceresney discussed the new SEC regime’s motto of strict enforcement and provided concrete, practical advice for defense lawyers on how to effectively interact with the SEC’s enforcement personnel.

Given the SEC’s ongoing commitment to deter current and future violations, Mr. Ceresney stated that the SEC will continue to increase penalties in an aggressive bid to deter misconduct.  He stated that “[t]here is room for bolder actions” and monetary penalties are a deterrent that everyone understands.  Mr. Ceresney also advised defense lawyers on how to handle meetings with SEC enforcement personnel.  He stated that defense lawyers should focus on a case’s broad policy or legal arguments, including the circumstances surrounding the case, the client’s settlement position, and any flaws in the legal theory and policy implications of the case.  Most importantly, stated Mr. Ceresney, defense lawyers must answer the SEC’s questions, must be trustworthy, and must not attempt to intimidate the SEC.

This new, hard-nosed SEC stance (championed since June) likely took shape after Judge Rakoff’s opinion in SEC v. Citigroup Global Mkts. Inc.  There, Judge Rakoff rejected the SEC and Citigroup’s settlement because of the court’s strong disapproval of the SEC’s long-standing policy of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations. Judge Rakoff further found that the settlement was not in the public interest because it gave no indication of “where the real truth lies.”  Following the aftermath of the Rakoff decision, several other federal judges have issued similar challenges to SEC settlements with corporate defendants.  In the wake of the judicial disapproval of these SEC settlements with corporate defendants, the SEC has enforced its new policy of requiring admissions.  It has been applied at least twice: first, in an $18 million fraud settlement with Philip Falcone and his hedge fund firm; and second, in a $920 million settlement with J.P. Morgan Chase & Co.

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