“The Result Is a Stew of Confusion and Hypocrisy Unworthy of Such a Proud Agency as the SEC”

That’s from Judge Rakoff’s opinion in SEC v. Vitesse Semiconductor Corp., 771 F. Supp. 2d 304 (S.D.N.Y. 2011), which was decided in March but which I just ran across. First the background:

Long before 1972, the S.E.C. had already begun entering into consent decrees in which the defendants neither admitted nor denied the allegations. This was strongly desired by the defendants because it meant that their agreement to the S.E.C.’s settlements would not have collateral estoppel consequences for parallel private civil actions, in which the defendants frequently faced potential monetary judgments far greater than anything the S.E.C. was likely to impose. But there were benefits for the S.E.C. as well. First, the practice made it much easier for the S.E.C. to obtain settlements. And second, at a time (prior to 1972) when the S.E.C.’s enforcement powers were largely limited to obtaining injunctive relief, the S.E.C.’s focus was somewhat more centered on helping to curb future misconduct by obtaining access to the Court’s contempt powers than on obtaining admissions to prior misconduct.

But, by 1972, it had become obvious that as soon as courts had signed off on such settlements, the defendants would start public campaigns denying that they had ever done what the S.E.C. had accused them of doing and claiming, instead, that they had simply entered into the settlements to avoid protracted litigation with a powerful administrative agency. Thus, the real change effected by the S.E.C. in 1972 was the requirement that a defendant who agreed to a consent judgment “without admitting or denying the allegations of the Complaint” nevertheless agree that the defendant would not thereafter publicly deny the allegations. To this end, each of the proposed Consent Judgments now presented to this Court is accompanied by a formal written “Consent” of the defendant agreeing, pursuant to 17 C.F.R § 205.5, “not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis.”

Now, Judge Rakoff’s view of the matter:

The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C. The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them either (though, as one would expect, his supporters feel no such compunction). Only one thing is left certain: the public will never know whether the S.E.C.’s charges are true, at least not in a way that they can take as established by these proceedings.

This might be defensible if all that were involved was a private dispute between private parties. But here an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.”

The disservice to the public inherent in such a practice is palpable. Confronted with the same choice, the United States Department of Justice has long since rejected allowing defendants, except in the very most unusual circumstances, to enter into pleas of nolo contendere, by which a defendant accepts a guilty plea to a criminal charge without admitting or denying the allegations….

Moreover, as a practical matter, it appears that defendants who enter into consent judgments where they formally state, with the S.E.C.’s full consent, that they neither admit nor deny the allegations of the complaint, thereafter have no difficulty getting the word out that they are still denying the allegations, notwithstanding their agreement not to “make any public statement” denying the allegations….

In a more recent case, SEC v. Citigroup Global Markets Inc. (S.D.N.Y. Nov. 28), Judge Rakoff reaffirmed that the practice might violate the First Amendment rights of the companies as well as undermining the interests of the government:

On its face, the SEC’s no-denial policy raises a potential First Amendment problem. See Vitesse, 771 F.Supp.2d at 309 (“[H]ere an agency of the United States is saying, in effect, ‘Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it’ ”); see also Crosby v. Bradstreet Co., 312 F.2d 483, 485 (2d Cir.1963) (reversing a consent settlement between two parties because the “injunction, enforceable through the contempt power, constitute[d] a prior restraint by the United States against the publication of facts which the community has a right to know”).

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