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by Laura Anthony, Esq.

SEC Announces it Will Seek an Admission of Fault to Settle Certain Cases

On June 18, the Securities and Exchange Commission (SEC) announced a policy change related to its settlement of certain civil matters.  In particular, the SEC has stated that it will now require that the settling party admit wrongdoing as part of a settlement.  Previously the standard language for all settlements has been that the defendants “neither admit nor deny wrongdoing.”  Defendants, of course, cannot be required to make such an admission or settle a case, but the alternative is fighting it out in court, an expensive and risky process.

The change in policy began with a related change in which the SEC changed its policy to require admissions of wrongdoing to settle cases where the defendant had already admitted such wrongdoing in related criminal cases.  Mary Jo White has now announced that, even in cases where there is no parallel criminal case, the SEC will now require individuals and companies to admit liability in “cases where… it’s very important to have that public acknowledgment [of wrongdoing] and accountability.”

She further stated that the determination of whether to seek an admission of wrongdoing will be done on a case-by-case basis, and she that the SEC will be looking to apply the policy to cases of egregious intentional conduct or widespread harm to investors.

The implications of the change are significant.  First, I note that the actual disclosures required in ’33 or ’34 Act registration statements or ’34 Act reporting requirements do not materially change, if at all.  Rule 401 of Regulation S-K governing disclosures related to officers, directors, promoters, and control persons is written in such a way that the order would be disclosable regardless of the admission of wrongdoing.  For example, Rule 401(f)(3)-(5) requires disclosure of the following events:

(3) Such person was the subject of any order, judgment, or decree not subsequently    reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

(ii) Engaging in any type of business practice; or

(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

(4) Such person was the subject of any order, judgment or decree not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;

(5) Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;

Regardless of the admission of wrongdoing, SEC settlement orders almost always contain injunctive relief disclosable under 401(f)(3) or (4)  above and always contain findings of fact and conclusions of legal violations requiring disclosure under (5) above.  Accordingly, a disclosure under these sections would not change.

However, instruction 3 to Rule 401(f) states that:

3. The registrant is permitted to explain any mitigating circumstances associated with events reported pursuant to this paragraph.

Here the disclosure could be quite different.  A registrant generally explains the factual circumstances and makes a statement to the effect that they deny wrongdoing but settled the matter to avoid the time, expense and uncertainty of litigation.  The decision to settle a case while admitting wrongdoing creates a drafting challenge as to how to explain the admission.

In addition to the disclosure issues, there is the overall concern of reputational damage.  Even if the settling party is not a reporting entity or person, the SEC publishes news regarding all administrative and litigation proceedings.  The SEC will not negotiate the contents of such releases, which are written in an unfavorable light to the charged party to help reinforce the SEC policy of deterring similar wrongful behavior and in keeping with the policy purpose itself, which is clearly deterrent-based.

Moreover, the admission could work as evidence—even dispositive evidence— in related civil litigation, including shareholder lawsuits.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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