The SEC is now demanding that companies admit wrongdoing. That’s a big deal.

Bad boys bad boys whatcha gonna do? (Mark Lennihan - AP)
Bad boys, bad boys, whatcha gonna do? (Mark Lennihan - AP)

For many years, the Securities and Exchange Commission was a pretty nonjudgmental beast. When pursuing enforcement actions, it usually didn't demand that its targets formally admit they did anything wrong, on the theory that it allowed for higher settlements that got relief to victims faster. It takes a lot of resources to build the kind of case that would achieve an admission of guilt, after all, and the SEC. needs to pick its battles.

Recently, however, judges and politicians like Democratic Sen. Elizabeth Warren have gotten impatient with that slap-on-the-wrist approach. One judge even refused to accept a settlement with Citigroup because, without an admission of wrongdoing, courts had to decide such cases without a full accounting of the facts.

A few weeks ago, SEC Chairwoman Mary Jo White announced a significant change in policy: For certain violations, the agency would no longer allow financial institutions to simply pay a fine without admitting wrongdoing (also known as a "nolo contendere" plea). And in its latest cases, the SEC has been following through, demanding an admission of guilt from JPMorgan in the case of the London Whale and extracting one from hedge fund adviser Philip Falcone.

But what's the point of a bank simply saying it's done wrong when everybody already knows it? Here's why getting an admission of guilt actually matters:

- Symbolism: Don't underestimate the importance of sending a message to banks and the public that the SEC is a policing agency, here to prosecute wrongdoing, not just to exact fines that banks can treat as the cost of doing business. It's the kind of thing that restores faith in government and eases the feeling that giant corporations are above the law while the little guy can't get away with anything.

- Subsequent litigation: An admission of guilt is likely to lead to class-action lawsuits, which will be hard to defend against. "The rules of evidence are complicated in subsequent or collateral litigation, but it becomes awfully difficult to defend against collateral suits if the wrongdoing in question, or even in related activities, has already been conceded," says Duke Law School professor Lawrence Baxter.

- Loss of reputation and investor confidence: Even for non-retail banks, the public acknowledgement of lawlessness can spook institutional investors, like large pension funds, which might decide to put their billions in a safer place.

- Possible loss of banking license: It's much easier for a bank to revoke your right to do business if you've admitted willful misconduct (although in recent cases, violations have been clear enough for New York state regulators to achieve eye-popping settlements by threatening to revoke licenses directly).

- Disqualifications: Some laws are written to bar entities that have ever been convicted of criminal acts, which could make it impossible for a company to operate even if it kept its license. The accounting firm Arthur Andersen, for one, collapsed after being found guilty of criminal complicity because the SEC can't accept audits from felons. Here's another scenario, courtesy of a 2012 paper by Duke Law's Samuel Buell: "To create a stylized example, a statutory framework might bar the issuance of licenses by a government agency 'to any person convicted of felony violation of section x of the Clean Water Act.'”

- Deterrent effects and bargaining power: Pursuing these cases is expensive for government agencies, and defendants might fight less hard in the future if one of them is held up as a public example.

- Greater potential for internal growth and reform: Often, firms brush aside enforcement actions as annoyances that are impossible to avoid in running a large and complex organization. Admissions of wrongdoing may lead them to confront cultural factors that led to the misdeeds. Buell writes, "Much as we seem to believe that confession is crucial to individual rehabilitation and redemption."

- More tax revenue: When companies don't admit guilt, they can get a tax deduction for the cost of their settlements, which partly explains why they fight so hard against them.

Civil prosecutors have long strongly discouraged nolo contendere pleas, Buell points out, and also tend to win more often. Even if settlements become harder to get because the SEC has to take banks to trial in order to achieve admissions of guilt, the balance of the results lean further on the side of justice. "Charging and settlement practices change, bargaining leverage shifts, incentives adjust, and a new equilibrium is reached," Buell writes. "This is in the nature of a litigation market."

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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