SEC Chairwoman Defends ‘No Wrongdoing’ Settlements

Securities and Exchange Commission Chairwoman Mary L. Schapiro said that the agency’s practice of reaching settlements with financial firms without them having to admit wrongdoing has “deterrent value” despite the fact that some of these firms have been charged more than once for violating the same securities laws. Schapiro noted that the commission ends up bringing a lot of the same kinds of securities cases so that people don’t forget their obligations or that they are being watched by an entity that will hold them responsible.

The SEC will often settle securities fraud cases with a financial firm my having the latter pay a fine and not denying (or admit) that any wrongdoing was done. Expensive court costs are avoided and a resolution is reached.

The SEC has said that financial firms won’t settle if they have to acknowledge wrongdoing because this could make them liable in civil cases filed against them over the same matters. Schapiro says the SEC only settles when the amount it is to receive by settling is about the same as it would likely get if the commission were to win the lawsuit in court.

As settlements often come with an agreement that the financial firm will overhaul its compliance, Schapiro considers there to be a “deterrent effect.” She also noted that settling allows investors to recoup their losses sooner rather than later, which would be the likely scenario if, and only if, the SEC were to win by going through litigation.

However, not everyone agrees that this “deterrent effect” actually does take place or that settling without denying or admitting does a lot of good. It was just last November that US District Judge Jed Rakoff turned down the SEC’s proposed $285 million mortgage-backed securities settlement with Citigroup and insisted that the securities fraud case be resolved through trial. Rakoff questioned why Citigroup was being allowed to settle without having to admit or deny wrongdoing even though the financial firm made $160M while investors lost more than $700 million. The SEC had accused Citigroup of selling collateralized debt obligations to investors even as the financial firm bet against the CDOs.

The New York Times, which analyzed enforcement cases, says that almost all large Wall Street financial firms have settled fraud cases multiple times by promising not to violate a law that they weren’t supposed to violate to begin with. A number of the settlements also repeatedly gave these companies exemptions from punishments that regulators and Congress had set up so as to prevent multiple violations.

Also among The New York Times’ findings:
• At least 51 fraud cases at 19 Wall Street firms in the past 15 years involved alleged violations of antifraud laws that the companies had previously agreed not to break.
• In almost 350 instances, the SEC let financial firms get around certain sanctions that should have been imposed.

Obtaining financial recovery can be tough—especially if you go for it without an experienced securities fraud law firm representing you. At Shepherd Smith Edwards and Kantas, LTD, LLP, we have helped thousands of investors recoup their losses.

Responding to Critics, S.E.C. Defends ‘No Wrongdoing’ Settlements, The New York Times, February 22, 2012

Judge Rakoff Squashes Citi’s $285 Million SEC Settlement, Forbes, November 28, 2011

More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup Woes Continue With FINRA Order to Pay Financial Adviser Team $24M Over Inadequate Compensation, Institutional Investor Securities Blog, January 28, 2012

Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 2011