As we previously reported, in 2012 and 2013 the Securities and Exchange Commission (SEC) changed its longstanding policy of permitting defendants to settle enforcement actions without admitting or denying liability. Initially, the policy was changed only with regard to settlements involving parallel criminal actions. Subsequently, the policy was further revised to require admissions in certain other cases, namely where:
- there was misconduct that harmed large numbers of investors, or placed investors or the market at risk of potentially serious harm;
- admissions might safeguard against risks the defendant posed to the investing public, particularly when the defendant engaged in egregious intentional misconduct; or
- the defendant engaged in unlawful obstruction of the SEC’s investigative process.
Since these changes and the SEC’s first case requiring an admission in August 2013, the SEC has been requiring admissions with greater frequency. Indeed, in just the past two weeks, the SEC has required admissions in three separate cases. Those actions were a case against Grant Thornton, LLP, charging improper professional conduct and aiding and abetting reporting violations; a case against Standard Bank PLC for securities fraud; and a case against Marwood Group Research, LLC, for compliance violations. Unfortunately, except for the Standard Bank PLC case, which involved a parallel criminal action by way of a deferred prosecution agreement with the United Kingdom’s Serious Fraud Office, the settlements do little to elucidate when the SEC will require admissions.
In the Grant Thornton settlement, the SEC required Grant Thornton to admit certain facts, including that its audits of two publicly traded companies violated the federal securities laws. It is not clear, and the SEC has not explained, why the SEC required an admission in this case. Interestingly, although the action against Grant Thornton arose from two deficient audits that involved improper accounting by the issuers, the SEC charged only one of the public companies, and that enforcement action was settled on a neither-admit-nor-deny basis. As for the second public company, the SEC filed an administrative proceeding against two former executives, which included allegations that they lied to Grant Thornton, but not against the company. Subject to a possible appeal, the SEC prevailed in a contested proceeding against the first former executive. But the second former executive, the issuer’s former chief financial officer, was permitted to enter into a settlement on a neither-admit-nor-deny basis.
In the Marwood settlement, the SEC required Marwood to admit certain facts and acknowledge that its conduct violated the federal securities laws. Significantly, the violations were for inadequate compliance procedures based on Marwood’s failure to have and enforce written policies and procedures to ensure that the chief compliance officer was provided with sufficient information to assess the handling of material, nonpublic information. Significantly, there was no finding that anyone misused such information. Additionally, the facts as presented do not suggest egregious intentional misconduct. The SEC nonetheless failed to explain why an admission was required or appropriate.
Given the prospect of greater collateral consequences and increased litigation and regulatory scrutiny associated with admissions, the SEC should disclose its rationale for requiring admissions in cases that do not involve parallel criminal proceedings or charge the defendant or respondent with securities fraud.