SEC may require more details of wrongdoing to be disclosed in settlements

By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, April 1, 2010

The Securities and Exchange Commission might end its long-standing practice of letting companies and individuals settle charges of wrongdoing without publicizing the detailed findings of its investigations, according to a senior official, a move that could reshape the enforcement of laws against corporate crime.

Under existing policy, companies and executives that settle lawsuits filed by the SEC typically pay a fine and agree to other sanctions, but they neither have to admit wrongdoing nor undergo a trial in which the details of their alleged misconduct would be unveiled. A settlement, the only public record of the case, can often be only a few pages in length.

But Robert Khuzami, the SEC's enforcement director, said in an interview that the agency is reconsidering the policy. "Typically our practice has been not to file in-depth factual findings of the investigation," Khuzami said. "We're taking a look at the practice and deciding whether it makes sense to provide a more fulsome record" in an effort to be more transparent.

Securities lawyers said a more detailed public record of cases could make defendants less likely to settle and make it easier for shareholders to file class-action lawsuits piggybacking on the SEC's claims. It could also lead to embarrassment for executives if the agency publicized their roles in violating securities law, even if they are not personally charged.

"If you're being accused of wrongdoing, it's in your interest to have as few of the facts revealed as possible," said Russell G. Ryan, a securities lawyer at King & Spalding. "To the extent that the SEC adopted a policy that would require a detailed recitation of the facts, companies might be more reluctant to agree to a settlement."

'Cynical relationship'

The question of whether the SEC should publicize details of its probes came into sharp focus recently after a federal judge challenged the agency's handling of its lawsuit accusing Bank of America of lying to investors. The SEC had accused the bank of concealing plans to pay billions of dollars in bonuses to employees of Merrill Lynch, the Wall Street firm it was buying. In its settlement with Bank of America, the agency issued a cursory overview of the allegations and set a $33 million fine. The bank denied wrongdoing, saying it agreed to the settlement to avoid a costly tussle with one of its key regulators.

The judge in the case, Jed S. Rakoff of the Southern District of New York, rejected the settlement in the fall. "This case suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators," he wrote at the time. "And all this is done at the expense, not only of the shareholders, but also of the truth."

Rakoff ordered the case to trial, but instead, the SEC and Bank of America agreed to a new settlement that added charges, nearly quintupled the fine and provided the court with thousands of pages of detailed evidence.

Supporters of a change in the agency's policy say it would put meat on the bones of SEC settlements and fit with its overall effort to revitalize its image as an aggressive enforcer of laws against financial crime.

"The settlement document has been an artifact," said John Coffee, a securities law professor at Columbia University. "The SEC is premised on the idea that sunlight is the best disinfectant, and a nontransparent settlement harms the SEC's reputation."

Today, settlements are carefully negotiated between SEC lawyers and defendants before they are submitted to a court for formal approval and publicized. SEC lawyers have often favored reaching settlement as quickly as possible to conserve resources by reducing the number of open cases. Securities lawyers say the policy change could delay settlements significantly.

"In a settlement, one of the benefits to resolving an action is you have some say or ability to make sure the facts are at least reasonably stated," said Barry Goldsmith, a securities lawyer at Gibson Dunn. "This would result in more prolonged and protracted negotiations to make sure those facts are accurate."

Seeking transparency

Khuzami, a former federal prosecutor, said a change in policy would increase transparency and offer more guidance about why the agency is taking the action it is taking. Sanctions tend to include fines, expulsion from the securities industry and orders for changes in business practices. The SEC can also refer matters to the Justice Department for criminal prosecution.

Virtually all SEC settlements include language stating that the defendants neither admit nor deny the allegations, even while they agree to sanctions. Those words can help protect defendants from class-action lawsuits that base their claims at least in part on an SEC settlement. Class-action suits cost companies many millions of dollars in additional legal fees and potential payout than regulatory action.

But securities lawyers say a more detailed explanation of wrongdoing could increase the odds of these suits being accepted by courts, despite the disclaimer.

If enacted, the change in settlement policy would put the SEC ahead of many other law enforcement agencies in terms of public disclosure of the wrongdoing its investigations uncover. The Justice Department, for example, often files a brief description of the facts supporting criminal charges when a defendant pleads guilty.

Then again, defendants must do other things to acknowledge culpability, including accepting responsibility in court and possibly a jail sentence.

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