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New SEC policy – admit wrongdoing

Under new Chairman Mary Jo White, the United States Securities and Exchange Commission (SEC) has moved away from its traditional settlement stance of resolving enforcement actions without an admission of wrongdoing. SEC leadership has said that in at least some cases – especially those where investors were significantly harmed or the alleged fraud was egregious – the SEC would require an admission of wrongful conduct.

Any admission of liability is a significant concern, especially if there is, or possibly will, be related civil or criminal litigation in the U.S. or elsewhere.

Perhaps the most significant settlement to date where such an admission has been required was the settlement by JP Morgan of the so-called “London Whale” case. In that case, JP Morgan was required to pay the SEC USD 200 million in penalties because of inadequate internal controls. In total JP Morgan paid more than USD 900 million to resolve actions with U.S. and UK regulatory authorities. In addition, the SEC required JP Morgan to admit wrongdoing and to specifically admit the facts that support a determination that its internal controls were inadequate. It is interesting to note that the admission of wrongdoing in the settlement will have very limited impact in any related civil actions because the admissions all relate to internal control violations that would not directly feature in any civil litigation.

There seem to be a number of early takeaways that have emerged from the comments of senior SEC leadership and from the JP Morgan case concerning admissions of wrongdoing. First, it seems clear that admissions of wrongdoing will not be required in most cases. Settlements that involve more isolated conduct or conduct that presents a low magnitude of harm will not likely require an admission. We would expect this to cover the vast majority of the SEC’s settlements. Second and conversely, the topic of whether an admission will be required will likely be discussed in any settlement talks with the SEC involving significant cases, especially those matters that garner significant publicity. While it may be possible to negotiate the SEC away from this requirement, the new reality would seem to be that admissions will likely be required in big ticket cases. Third, based on the language in the JP Morgan settlement, there appears to be at least some opportunity to negotiate and attempt to limit the admissions or their usefulness in subsequent litigation. While the new policy is not ideal for settling defendants, there is some possibility of mitigating its effects.

Contributed by William E White

Legal and Regulatory Risk Note
United States

Any admission of liability is a significant concern, especially if there is, or possibly will be, related civil or criminal litigation in the U.S. or elsewhere.