In the past the Securities and Exchange Commission had allowed defendants to settle civil and administrative claims brought by the SEC without requiring defendants to admit or deny liability. However, there has been a change of policy with the recent appointment of the new SEC Chair Mary Jo White. Now, in “egregious” cases, the SEC will push extremely hard for, and in fact almost require, an admission of wrongdoing.

This new policy creates a tactical dilemma for defense counsel on several fronts. Defense counsel needs to be cognizant that shareholders will be able to use the admission of wrongdoing as the main exhibit in any civil lawsuit brought against their client. As a result, timing is a consideration. Settle to early before the statute of limitations runs on the civil side and the results can be disastrous.

However, the real conundrum for defense counsel is predicting how the Department of Justice will react in its parallel criminal investigation when its target has just admitted wrongdoing in writing. Making matters worse is the fact that it is the “egregious” cases that the DOJ is interested in. Will DOJ prosecutors be satisfied with the admission of wrongdoing in the SEC case or use it as low hanging fruit in its criminal prosecution?

In addition, can you even enter into a settlement with the SEC where you admit wrongdoing and not commit perjury? Defendants will occasionally give testimony to the SEC early in the process minimizing their role. Does the admission of wrongdoing in the settlement directly contradict the earlier statements? Do you need to take the 5th amendment earlier on in the SEC investigation to prevent this from happening?

Time will tell how this new course being embarked upon the SEC will play out. What I can say for sure however it that at this point, at least, the real play is to convince the SEC at the outset that the conduct being investigated is not “egregious” thereby bypassing the need for any admission of wrongdoing. If you have questions please feel free to contact Douglas Leavitt or H. Adam Shapiro at Danziger Shapiro & Leavitt, P.C. and we will be happy to discuss your situation in confidence.

This entry is presented for informational purposes only and is not intended to constitute legal advice.

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