SEC Changes “Neither Admit Nor Deny” Practice
for Criminal Conviction Cases

January 9, 2012

The SEC will no longer permit defendants who admit relevant conduct in parallel criminal proceedings to “neither admit nor deny” that conduct in settlement orders.

The SEC has had a longstanding practice that permitted all defendants who entered into settlements neither to admit nor deny the factual allegations in the charging document.  This practice applied even where a defendant admitted conduct in a parallel criminal case that was relevant to the subject of the SEC settlement. 

In the face of criticism of its “neither admit nor deny” practice by courts and Congress, the SEC announced the following change last week.  Now, where a defendant is the subject of a parallel criminal conviction, non-prosecution agreement (“NPA”) or deferred prosecution agreement (“DPA) that includes admissions or acknowledgements of conduct, the SEC will no longer permit that defendant to enter into a settlement with the SEC in which the defendant is permitted neither to admit nor deny conduct that same defendant has admitted or acknowledged in a parallel criminal proceeding.  SEC settlement orders will now cite the fact and nature of the criminal disposition, and the SEC staff will also have the discretion to incorporate into the settlement order any relevant facts admitted during the defendant’s plea allocution or in a jury verdict form or in the NPA or DPA. 

As a practical matter, the change announced last week will affect only the minority of cases where parallel criminal conduct has been admitted or otherwise estalished and it will not have any direct impact on the traditional “neither admit nor deny” approach in settlements that do not involve criminal convictions or admissions of criminal law violations.  The SEC’s newly announced approach is likely to arise most notably in cases involving the Foreign Corrupt Practices Act or insider trading, where SEC enforcement actions often run parallel to criminal proceedings.  Targets of such enforcement actions would be well advised to be mindful of the SEC’s new practice in entering into settlement negotiations generally and in negotiating the terms of the relevant SEC charging documents in particular.  There may well still be room for meaningful negotiation as to which facts the SEC should require be admitted in any settlement, particularly given that the SEC’s newly announced practice does not require admissions beyond those made in the criminal case.

This recent change in practice comes on the heels of the recent Citigroup case in the U.S. District Court for the Southern District of New York, where Judge Jed S. Rakoff declined to approve a consent order between the SEC and Citigroup because the order did not contain any admissions.  Judge Rakoff called the practice of permitting defendants to enter into consent judgments without admitting the underlying allegations “hallowed by history, but not by reason.”  The parties have appealed Judge Rakoff’s ruling to the U.S. Court of Appeals for the Second Circuit.  The SEC has said that it began reviewing its “neither admit nor deny” policy last spring and that the recent change is unrelated to this criticism. 

In the near term, the Second Circuit’s decision in the pending Citigroup case and the hearings on this topic planned for 2012 by the Committee on Financial Services of the U.S. House of Representatives may result in further modifications and refinements to the SEC’s practices.  In the longer term, there may be pressure on the SEC to obtain admissions in high profile matters even where there is no parallel criminal case.  Also, the “neither admit nor deny” formulation is used by virtually every other federal civil law enforcement agency in addition to the SEC, so it is possible that other agencies may well follow the SEC’s lead in this regard.  Finally, to the extent this and other changes to settlement polices at the SEC and other federal agencies make matters harder to settle, the number of litigated matters might increase and parties might begin to experiment with alternate ways to resolve cases.

If you have questions regarding this publication, please contact any of the lawyers listed below or your regular Davis Polk contact.

Carey R. Dunne212 450
Scott W. Muller212 450
Linda Chatman Thomsen202 962


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