by Verity Winship and Jennifer K. Robbennolt
What is the connection between what the SEC actually does and what it says it will do? In 2013, the SEC unveiled a new policy requiring some enforcement targets to admit wrongdoing when they settled with the agency. In An Empirical Study of Admissions in SEC Settlements, we analyze settlements from before and after the introduction of this policy to determine how the SEC’s practice lines up with its new approach to admissions. We find an uptick of admissions following the policy announcement, with the highest number in FY2016. Using an inclusive definition of admissions, we identify fewer than one hundred settlements containing admissions that were announced during the seven years of our study (FY2011-FY2017).
For many years prior to 2013, targets of SEC enforcement could settle with the agency without admitting or denying that they had done anything wrong. The SEC came under fire for this policy, particularly in the long aftermath of the 2007-2008 financial crisis. Critics, including prominent judges, put pressure on the agency to require admissions as a way to hold wrongdoers accountable.[1] In response, the SEC announced policy changes requiring admissions when doing so would further public accountability.[2] By November 2016, then-SEC Chair Mary Jo White heralded the “transformative impact” of the agency’s new requirements.[3]
Our data set is comprised of SEC settlements announced from SEC FY2011 to FY2017 that required any type of admission from the settling target. It encompasses the full text of the underlying agreements between the SEC and the target, which takes our analysis beyond the summary descriptions of agreements in SEC press and litigation releases. We find more settlements containing admissions in fiscal years 2014 through 2017 as compared to prior years, with a high point in FY2016. However, the overall number of settlements containing admissions is still low: we identified 99 settlements containing admissions that were announced during the relevant time period, using an inclusive definition of admissions. We also found that slightly fewer than half of the targets in settlements containing admissions were individuals rather than entities. Although some admissions were in high-profile cases, almost half of the settlements we identified resulted in low or no monetary sanctions.
Number of Settlements Containing Admissions
(SEC FY2011 to FY2017)
NOTES. SEC fiscal years run from Oct. 1 through Sept. 30. Settlements are those announced within a fiscal year.
These numbers, however, do not tell the whole story. Our analysis also breaks down the umbrella term “admissions of wrongdoing” to specify sub-categories of targets’ admissions (including facts, general and specific legal violations, and scienter). We point to differences within each sub-category as well. We identify, for example, settlements that admit to an extensive appendix of facts, that admit to a bare-boned description of facts or status, and that admit to facts already admitted in a parallel proceeding. Our findings reveal a more nuanced picture, illustrating the prominent role of factual admissions, and identifying admissions of wrongdoing, knowledge, and recklessness that might otherwise be missed. The low number of settlements with admissions of wrongdoing makes it difficult to conclude, however, that the new approach has transformed SEC settlement practices.
Footnotes
[1] See, e.g., S.E.C. v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328, 332 (S.D.N.Y. 2011) (Rakoff, J.) (criticizing the SEC’s former admissions policy because it deprives courts of assurance that the relief they are asked to impose has any basis in fact).
[2] SEC Chair Mary Jo White, Deploying the Full Enforcement Arsenal, Remarks to the Council of Institutional Investors, Chicago, IL (Sept. 26, 2013); see also Robert Khuzami, Public Statement by SEC Staff: Recent Policy Change, SEC (Jan. 7, 2012).
[3] SEC Chair Mary Jo White, A New Model for SEC Enforcement: Producing Bold and Unrelenting Results, Speech at the NYU Program on Corporate Compliance and Enforcement and the NYU Pollack Center for Law and Business (Nov. 18, 2016).
Verity Winship is a Professor of Law at the University of Illinois College of Law. Jennifer K. Robbennolt is the Alice Curtis Campbell Professor of Law and Professor of Psychology at the University of Illinois at Urbana-Champaign.
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