Admit It! Corporate Admissions of Wrongdoing in SEC Settlements

Transcription

NOTES
Admit It! Corporate Admissions of Wrongdoing in
SEC Settlements: Evaluating Collateral Estoppel
Effects
JASON E. SIEGEL*
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
434
I. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
435
A.
A BRIEF HISTORY OF THE SEC AND ITS “NO ADMIT, NO DENY”
........................................
435
.........
436
..................
438
.........................
440
II. EVALUATING CONSEQUENCES OF AN ADMISSION OF WRONGDOING . . .
442
POLICY
B.
THE FINANCIAL CRISIS OF 2007–2008 AND AFTERMATH
C.
JUDGE RAKOFF AND THE RAKOFF EFFECT
D.
THE COMMISSION’S RESPONSE
A.
.............................
443
1.
The Viability of Estoppel in Criminal Proceedings . . . . .
443
2.
The Viability of Estoppel in Private Actions . . . . . . . . .
444
3.
Determining the Scope of the Preclusive Effect . . . . . . .
452
....................
453
III. CASE STUDIES AND OBSERVATIONS . . . . . . . . . . . . . . . . . . . . . . . .
455
B.
A.
COLLATERAL ESTOPPEL
OTHER COLLATERAL CONSEQUENCES
....................................
455
1.
Harbinger Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .
455
2.
JPMorgan Chase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
456
3.
ConvergEx Group . . . . . . . . . . . . . . . . . . . . . . . . . . . .
458
CASE STUDIES
* Jason E. Siegel is an attorney with the U.S. Office of Special Counsel (OSC), Disclosure Unit. He
received a J.D. from Georgetown University Law Center in 2014 and a B.A. in Political Science from
Rice University in 2009. The views expressed in this Note do not represent the views of OSC or of the
United States. © 2015, Jason E. Siegel. He thanks his editor, Emily Luken. He also thanks John F.
Olson of Gibson, Dunn, and Crutcher LLP for his encouragement and guidance on this Note. Finally, he
thanks his family for believing in him and Allison King for her unwavering support.
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4.
Scottrade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
459
5.
Credit Suisse Group . . . . . . . . . . . . . . . . . . . . . . . . . . .
459
6.
Lions Gate Entertainment . . . . . . . . . . . . . . . . . . . . . . .
460
7.
Bank of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
461
8.
Wells Fargo Advisors . . . . . . . . . . . . . . . . . . . . . . . . . .
461
...................................
462
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
464
B.
OBSERVATIONS
INTRODUCTION
In June of 2013, U.S. Securities and Exchange Commission (SEC) Chair
Mary Jo White announced one of the most significant reforms to the agency’s
settlement policies in its eighty-year history of regulating the financial markets.
In certain cases of “egregious” conduct, the Commission would require from
defendants an explicit admission of wrongdoing as a non-negotiable condition
of settlement.1 In these cases, the agency’s time-honored policy of allowing
defendants to neither admit nor deny the SEC’s factual allegations—while
disgorging their ill-gotten gains and paying penalties—would not apply.2 Chair
White has championed this asterisk to its “no admit, no deny” policy as a
common-sense move towards greater public accountability,3 but the liability
ramifications for defendants could be sweeping and grave.
Enter the legal creature known as offensive nonmutual collateral estoppel.
Mercifully for the reader, it goes by other names, and in this Note, it will go by
the general term “collateral estoppel” or simply “issue preclusion.” Under the
common law doctrine, a plaintiff may bar a defendant from relitigating an issue
that was determined against the defendant in a prior lawsuit.4 For defendants of
SEC enforcement actions, the doctrine may spell trouble: if a defendant admits
to fraudulent misconduct in settling with the agency, and a plaintiff class sues
the defendant over the same misconduct, the class might preclude the defendant
from relitigating the issues and score an easy win at trial or an effortless
recompense by settlement.5 This raises the stakes appreciably for defendants,
1. James B. Stewart, S.E.C. Has a Message for Firms Not Used to Admitting Guilt, N.Y. TIMES (June
21, 2013), http://www.nytimes.com/2013/06/22/business/secs-new-chief-promises-tougher-line-oncases.html.
2. See discussion infra section I.A.
3. Mary Jo White, Chair, Sec. & Exch. Comm’n, Chairman’s Address at SEC Speaks 2014 (Feb. 21,
2014), http://www.sec.gov/News/Speech/Detail/Speech/1370540822127.
4. See discussion infra section II.A.
5. See Examining the Settlement Practices of U.S. Financial Regulators: Hearing Before the H.
Comm. on Fin. Servs., 112th Cong. (2012) (statement of Robert Khuzami, Director, Division of
Enforcement, U.S. Securities and Exchange Commission), https://www.sec.gov/News/Testimony/Detail/
Testimony/1365171489454 [hereinafter Khuzami, Testimony]; SEC’s Andrew Ceresney Defends Neither Admit Nor Deny Settlements, CORP. CRIME REP. (June 6, 2013, 2:01 PM), http://www.
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who must choose the words of their settlements carefully.
This Note provides an analytical framework for evaluating or controlling the
likelihood of collateral estoppel effects of a given settlement containing an
admission.6 Part I recounts the history and development of the agency’s admissions policy, with particular emphasis on events since the Financial Crisis of
2007–2008. Practitioners with a firm understanding of the policy and its origins
are advised to skip directly to Part II. Part II unpacks the collateral estoppel
doctrine in the context of SEC settlements containing admissions of fraudulent
corporate misconduct by assessing the viability of estoppel in subsequent
criminal prosecutions, the viability of estoppel in subsequent private actions,
and the scope of issues precluded where the doctrine does apply. This Part also
provides a short survey of other potential consequences of admissions. Part III
examines as case studies the first eight SEC settlements containing admissions
of wrongdoing, extracted in the first year of the new regime, and makes general
observations about the agency’s implementation of the new policy.
I. BACKGROUND
A. A BRIEF HISTORY OF THE SEC AND ITS “NO ADMIT, NO DENY” POLICY
The Stock Market Crash of 1929 unearthed a toxic domestic investment
landscape built on lies and deceit.7 Half of the $25 billion in securities floated in
the decade after World War I proved to be worthless, a product of dealers’
“[a]lluring promises of easy wealth” made with little or no regard to communicating facts essential to appraising value.8 In the wake of this catharsis, Congress passed the Securities Act of 1933 (the ’33 Act), which required companies
to register their public securities offerings and continuously disclose “all material information necessary for investors to fully assess the merits” of securities
purchases.9 The following year, Congress passed the Securities Exchange Act of
1934 (the ’34 Act), which established the SEC to manage the new disclosures
corporatecrimereporter.com/news/200/secceresneyneitheradmitnordeny06062013; Robert Khuzami, Dir.,
Div. of Enforcement, Sec. & Exch. Comm’n, Remarks Before the Consumer Federation of America’s
Financial Services Conference (Dec. 1, 2011), http://www.sec.gov/news/speech/2011/spch120111rk.htm
[hereinafter Khuzami, Remarks] (“[M]any companies would refuse to settle cases if they are required to
admit unlawful conduct because that might expose them to additional lawsuits by litigants seeking
damages.”).
6. A brief note on scope is appropriate. The SEC’s revised admissions policy may have far-reaching
consequences for a broad array of actors under varying circumstances. Though it may have extensive
implications, this Note focuses on consequences and decision analyses for corporate defendants facing
SEC civil charges of intentional securities fraud and possible private class actions or criminal
prosecutions over the same misconduct. Consequences for the agency, whether the Commission adheres
to its pronounced criteria for requiring admissions, defendants in their personal capacities, preclusive
effects of trial outcomes, and private actions over unrelated misconduct generally fall outside the scope
of this Note.
7. See, e.g., H.R. REP. NO. 73-85, at 2 (1933), reprinted in JAMES D. COX, ROBERT W. HILLMAN &
DONALD C. LANGEVOORT, SECURITIES REGULATION: CASES AND MATERIALS 3 (6th ed. 2009).
8. Id.
9. COX ET AL., supra note 7, at 3–4.
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regime and regulate trading on the securities markets.10
Over the decades, the SEC developed or refined an arsenal of legal weapons
to combat deceptions in the investments industry. For instance, the civil antifraud statutes of the ’33 Act and the ’34 Act, discussed more fully in section
II.A.3, empowered the agency to prosecute materially false or misleading
statements in connection with securities transactions. But as it grew into its role
as the federal government’s primary enforcer of the integrity of the securities
markets, the agency discovered that many defendants were actively undermining the value of truthful disclosures into the marketplace. Respondents to
securities fraud actions would settle charges and then “start public campaigns
denying that they had ever done what the [SEC] had accused them of
doing[,] . . . claiming, instead, that they had simply entered into the settlements
to avoid protracted litigation with a powerful administrative agency.”11 To
address this concern, in 1972 the agency announced that it would no longer
allow defendants to settle charges while denying the allegations.12 Should a
defendant thus wish to speak on its matter publicly, it could only admit to the
allegations or state that it “neither admits nor denies” them.13 The requirement
became known as the agency’s “no admit, no deny” policy.
Aside from the subset of cases discussed in this Note, the SEC continues to
settle its enforcement actions under the terms of “no admit, no deny.”14 Other
agencies routinely use similar terms.15 Unlike other agencies, however, including the Department of Justice and the Federal Trade Commission, the SEC does
not make exceptions to allow some defendants to deny wrongdoing after
settling charges with the government.16
B. THE FINANCIAL CRISIS OF 2007–2008 AND AFTERMATH
In 2007, the world watched in horror as a reported $1 trillion in mortgagebacked securities teetered on the brink of failure.17 Emboldened by low federal
10. See id. at 6–7.
11. SEC v. Vitesse Semiconductor Corp., 771 F. Supp. 2d 304, 308 (S.D.N.Y. 2011).
12. See Consent Decrees in Judicial or Administrative Proceedings, Securities Act Release No.
33-5337 (Nov. 28, 1972) (codified at 17 C.F.R. § 202.5(e)). The same year, the agency consolidated its
investigatory and prosecutorial activities into the Division of Enforcement. See About the Division of
Enforcement, SEC, http://www.sec.gov/divisions/enforce/about.htm (last visited Mar. 30, 2014).
13. 17 C.F.R. § 202.5(e) (2013).
14. For SEC litigation releases and administrative notices and settlements, see Litigation, SEC,
http://www.sec.gov/litigation.shtml (last visited Mar. 30, 2014).
15. See Peter Lattman, Court Hears Arguments on Judge’s Rejection of S.E.C.-Citigroup Deal, N.Y.
TIMES DEALBOOK (Feb. 8, 2013, 1:43 PM), http://dealbook.nytimes.com/2013/02/08/appeals-court-hearsarguments-over-judge-rakoffs-rejection-of-citigroup-settlement; Sarah N. Lynch, SEC Settlement Policy
May Pressure Other Agencies to Toughen Up, REUTERS (June 19, 2013, 5:37 PM EDT), http://
www.reuters.com/article/2013/06/19/sec-settlements-policy-idUSL2N0EV1AC20130619; see also Khuzami, Testimony, supra note 5.
16. See Khuzami, Testimony, supra note 5; see also Khuzami, Remarks, supra note 5; Lynch, supra
note 15.
17. See, e.g., Manoj Singh, The 2007–08 Financial Crisis in Review, INVESTOPEDIA (Feb. 26, 2009),
http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp.
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interest rates, American bankers had offered millions of home loans to borrowers with poor credit, repackaged the loans as collateralized debt obligations, and
passed the risk of default on to other investors.18 When interest rates rose,
borrowers defaulted on their loans en masse and triggered a “global financial
tsunami.”19 As the full extent of the crisis came into view, lawmakers looked to
the SEC. Outmatched by the financial ingenuity of the private sector, Wall
Street’s biggest regulator was caught off guard. A popular article in Rolling
Stone magazine characterized the agency’s performance “before, after, and
during the crash” as “comically inept.”20
Already incensed over the SEC’s handling of mortgage-backed securities,
lawmakers pummeled the agency in a 2009 hearing before the House Financial
Services Committee about its failure to investigate Bernie Madoff’s $50 billion
Ponzi scheme before the operation’s late 2008 collapse.21 Then, a stinging
report by the Government Accountability Office found that the agency’s lenient
corporate penalty policies had compromised the integrity of its enforcement
program.22
Fifteen days after arriving at the SEC, Chairman Mary Schapiro asked the
director of the Division of Enforcement (Enforcement) to resign.23 Schapiro
replaced her with the former prosecutor Robert Khuzami, and the two “mov[ed]
swiftly to reverse major decisions by her [own] predecessor” and revamp the
division for the modern era of complex financial fraud.24 Among these changes,
Schapiro unchained the Enforcement staff from the five-member Commission
by allowing them to negotiate with defendants without prior approval—a
18. See id.
19. Id.
20. Matt Taibbi, SEC: Taking on Big Firms Is ‘Tempting,’ but We Prefer Picking on Little Guys,
ROLLING STONE (May 30, 2012), http://www.rollingstone.com/politics/blogs/taibblog/sec-taking-on-bigfirms-is-tempting-but-we-prefer-whaling-on-little-guys-20120530.
21. See Robert Chew, Mary Schapiro Moves Quickly to Shake Up the SEC, TIME (Feb. 11, 2009),
http://content.time.com/time/business/article/0,8599,1878786,00.html; Diana B. Henriques, At Madoff
Hearing, Lawmakers Lay into S.E.C., N.Y. TIMES, Feb. 5, 2009, http://www.nytimes.com/2009/02/05/
business/05madoff.html. The SEC’s inspector general found that “the SEC received more than ample
information in the form of detailed and substantive complaints over the years to warrant a thorough and
comprehensive examination and/or investigation of Bernard Madoff.” SEC OFFICE OF INVESTIGATIONS,
OIG-509, INVESTIGATION OF FAILURE OF THE SEC TO UNCOVER BERNARD MADOFF’S PONZI SCHEME 20–21
(2009), available at http://www.sec.gov/news/studies/2009/oig-509.pdf.
22. See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-09-358, SECURITIES AND EXCHANGE COMMISSION:
GREATER ATTENTION NEEDED TO ENHANCE COMMUNICATION AND UTILIZATION OF RESOURCES IN THE DIVISION
OF ENFORCEMENT 39 (2009).
23. See Chew, supra note 21.
24. Stephen Labaton, S.E.C. Chief Pursues Tougher Enforcement, N.Y. TIMES, Feb. 23, 2009,
http://www.nytimes.com/2009/02/23/business/23schapiro.html; see also Jenna Greene, New Enforcement Chief Aims to Restore Confidence in SEC, CORP. COUNS. (Oct. 20, 2009), http://www.corpcounsel.
com/id⫽1202434811613/New-Enforcement-Chief-Aims-to-Restore-Confidence-in-SEC. The effort coincided with crushing rulemaking responsibilities imposed by Congress under the Dodd–Frank Act of
2010. Noam Noked, SEC Speaks 2013: Waiting for the New Guard, HARV. L. SCH. F. ON CORP.
GOVERNANCE & FIN. REG. (Mar. 14, 2013, 9:27 AM), http://blogs.law.harvard.edu/corpgov/2013/03/14/
sec-speaks-2013-waiting-for-the-new-guard.
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political, demoralizing process that had delayed and watered down settlements
under the tenure of Chairman Christopher Cox.25 By 2012, the agency was
levying “some of the largest financial penalties and forfeitures ever imposed.”26
C. JUDGE RAKOFF AND THE RAKOFF EFFECT
Despite two-and-a-half years of significant reforms in the Division of Enforcement,27 criticism mounted from the judiciary. In September 2009, Judge Jed
Rakoff of the U.S. District Court for the Southern District of New York
disrupted a long history of rubber stamped SEC settlements28 by rejecting the
agency’s $33 million settlement with Bank of America over a materially false
proxy statement requesting approval of the bank’s $50 billion Merrill Lynch
acquisition.29 In a scathing, widely circulated opinion, Judge Rakoff questioned
why a defendant could pay a fine without admitting to misconduct: “[T]he
proposed Consent Judgment,” he declared, “was a contrivance designed to
provide the S.E.C. with the facade of enforcement and the management of the
Bank with a quick resolution of an embarrassing inquiry—all at the expense of
the sole alleged victims, the shareholders.”30 He ultimately approved a revised,
$150 million settlement.31
In November 2011, Judge Rakoff rejected a second SEC settlement, this time
over Citibank’s fraudulent misrepresentation of its short position on mortgagebacked securities unloaded on unwitting buyers.32 Investors had lost $700
million, Citigroup had netted $160 million, and the SEC sought disgorgement,
25. See Labaton, supra note 24; see also Zachary A. Goldfarb, In Cox Years at the SEC, Policies
Undercut Action, WASH. POST (June 1, 2009), http://www.washingtonpost.com/wp-dyn/content/article/
2009/05/31/AR2009053102254_pf.html. Under Cox’s tenure, corporate penalties fell by 84%. Id. A
frequent criticism of corporate penalties was that they “ultimately were shouldered by shareholders—
the very people most frequently hurt by fraud.” Id.
26. Wayne M. Carlin, White Collar and Regulatory Enforcement: Emerging Trends, HARV. L. SCH. F.
ON CORP. GOVERNANCE & FIN. REG. (Jan. 30, 2013, 1:18 PM), http://blogs.law.harvard.edu/corpgov/2013/
01/30/white-collar-and-regulatory-enforcement-emerging-trends (providing an excellent description of
emerging trends in the Division of Enforcement). The agency imposed a record-setting $3.4 billion in
sanctions in the 12-month period through September 2013. Jean Eaglesham, SEC Brings Fewer
Enforcement Actions, Slows Early-Stage Probes, WALL ST. J. (Dec. 17, 2013, 12:21 PM ET), http://
online.wsj.com/news/articles/SB10001424052702304403804579264293892648268.
27. See discussion infra section I.D.
28. See Lattman, supra note 15.
29. See SEC v. Bank of America Corp., 653 F. Supp. 2d 507, 508 (S.D.N.Y. 2009); see also Zachary
A. Goldfarb, Judge Criticizes, but Approves, Settlement with Bank of America, WASH. POST (Feb. 23,
2010), http://www.washingtonpost.com/wp-dyn/content/article/2010/02/22/AR2010022202062.html (noting that Rakoff had “a reputation for refusing to rubber-stamp regulatory settlements”).
30. Bank of America, 653 F. Supp. 2d at 510.
31. See SEC v. Bank of America Corp., No. 09 Civ. 6829(JSR), 2010 WL 624581, at *5–6 (S.D.N.Y.
Feb. 22, 2010).
32. See SEC v. Citigroup Global Mkts. Inc., 827 F. Supp. 2d 328, 330 (S.D.N.Y. 2011). In late 2013,
Judge Rakoff also questioned the SEC’s proposed settlement with Heinz Co., because it included a “no
admit, no deny” provision. Karen Gullo, Heinz ‘No-Admit’ Insider-Trading Accord Draws Scrutiny,
BLOOMBERG (Jan. 31, 2014), http://www.bloomberg.com/news/print/2014-01-31/heinz-no-admit-insidertrading-accord-draws-scrutiny.html.
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interest, and a $95 million penalty.33 Because Citigroup neither admitted nor
denied the agency’s allegations, the judge explained, the settlement did “not
provide the Court with a sufficient evidentiary basis to know whether the
requested relief [was] justified.”34 Brushing aside the agency’s contention that
the settlement was in the public’s interest because it made detailed, factual
allegations that would expose truth to the public, Judge Rakoff countered that
allegations without admissions are of no legal value and are generally disregarded as “a cost of doing business.”35
On appeal, the U.S. Court of Appeals for the Second Circuit held that Judge
Rakoff had abused his discretion: an SEC consent judgment must be presumed
fair, reasonable, and not contrary to the public interest, unless there exists “a
substantial basis in the record for concluding” otherwise.36 Furthermore, “[i]t is
not within the district court’s purview to demand ‘cold, hard, solid facts,
established either by admissions or by trials,’ as to the truth of the allegations in
the complaint as a condition for approving a consent decree.”37 “Trials are
primarily about the truth. Consent decrees are primarily about pragmatism.”38
Although the Second Circuit unambiguously rebuffed Judge Rakoff’s assault on
the SEC, the opinion did not come until June of 2014 and thus failed to stem his
influence over the judiciary.
Following Judge Rakoff’s 2009 decision in Bank of America, at least seven
other federal judges questioned or refused to approve SEC settlements, for
varying reasons.39 Commentators began wondering whether the judge was
33. See Citigroup, 827 F. Supp. 2d at 329–30.
34. Id. at 332.
35. Id. at 333. After the decision, Khuzami maintained that “[r]efusing an otherwise advantageous
settlement solely because of the absence of an admission . . . would divert resources away from the
investigation of other frauds and the recovery of losses suffered by other investors not before the
court.” Robert Khuzami, Public Statement by SEC Staff: Court’s Refusal to Approve Settlement in
Citigroup Case, SEC (Nov. 28, 2011), http://www.sec.gov/news/speech/2011/spch112811rk.htm. Khuzami also saw value in “returning money to harmed investors quickly.” Khuzami, Remarks, supra note
5.
36. SEC v. Citigroup Global Mkts., Inc., 752 F.3d 285, 294 (2d Cir. 2014). The appeals court noted
that a judge is still entitled to inquire if “the record raises a suspicion that the consent decree was
entered into as a result of improper collusion.” Id. at 296. Judge Rakoff approved the consent judgment
in August 2014. See SEC v. Citigroup Global Mkts. Inc., No. 11-cv-7387 (JSR), 2014 WL 3827497, at
*1 (S.D.N.Y. Aug. 5, 2014).
37. Citigroup Global Mkts., 752 F.3d at 295 (citing Citigroup, 827 F. Supp. 2d at 335).
38. Id.
39. Judge Rudolph Randa of the Eastern District of Wisconsin, SEC v. Hohol, No. 14-C-41, 2014
WL 461217, at *2 (E.D. Wis. Feb. 5, 2014); Judge Victor Marrero of the Southern District of New
York, SEC v. CR Intrinsic Investors, LLC, 939 F. Supp. 2d 431, 436, 439 (S.D.N.Y. 2013); Judge
Frederic Block of the Eastern District of New York, Transcript of Civil Cause for Civil Hearing at
13–24, SEC v. Cioffi, No. 08-CV-02457 (FB) (E.D.N.Y. Feb. 13, 2012), available at http://
www.msfraud.org/law/lounge/Bear-Stearns_cioffi-hearing-transcript_2-12.pdf; Judge John Kane of the
District of Colorado, Court Rejects SEC Settlement in Alleged Ponzi Scam, BLOOMBERG BNA (Jan. 22,
2013), http://www.bna.com/court-rejects-sec-settlement-in-alleged-ponzi-scam (last visited Nov. 12,
2014); Judge Richard Leon of the District of D.C., Christopher M. Matthews, Judge Blasts IBM, SEC
Bribery Settlement, WALL ST. J. (Dec. 20, 2012, 10:03 PM ET), http://online.wsj.com/news/articles/
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rousing a movement within the judiciary—a “Rakoff effect”40—that would
culminate in the demise of “no admit, no deny.”41
D. THE COMMISSION’S RESPONSE
As the Rakoff effect gathered steam in early 2011, SEC Commissioner Luis
Aguilar called for an end to the “revisionist history” of corporate press releases
“explaining how the conduct was really not that bad or that the regulator
over-reacted.”42 Defendants should “take accountability for their violations,” he
remarked, “and issue mea culpas to the public.”43 A year later, Khuzami
announced the first reform to the SEC’s admissions policy in four decades:
where a defendant is convicted of or admits to violations in a criminal prosecution, the SEC would require an admission of wrongdoing to settle a parallel
action.44 The move was of little legal significance, because any defendant
deemed guilty of a criminal securities violation is generally guilty of a civil
violation arising out of the same misconduct.45 But symbolically, it signaled the
agency’s growing unease with “no admit, no deny” and foreshadowed a more
meaningful shift in policy to come.
The criticism continued. In 2012, the House Financial Services Committee
held a hearing on “no admit, no deny.”46 In 2013, Senator Elizabeth Warren
SB10001424127887323777204578192040347143214; Judge Ellen Segal Huvelle of the District of
D.C., Kara Scannell, Judge Won’t Approve Citi-SEC Pact, WALL ST. J. (Aug. 17, 2010, 12:01 AM ET),
http://online.wsj.com/news/articles/SB10001424052748704868604575433833841630548; and Judge Sidney Stein of the Southern District of New York, The Securities and Exchange Commission: Rakoff’s
Revenge, ECONOMIST, Apr. 13, 2013, http://www.economist.com/node/21576132.
40. See, e.g., John A. Goldmark, Judge Refuses to Approve 2 FCPA Settlements, Indicating Deals
with the SEC Will Be Closely Scrutinized, DAVIS WRIGHT TREMAINE LLP (Apr. 2013), http://www.dwt.com/
Judge-Refuses-to-Approve-2-FCPA-Settlements-Indicating-Deals-With-the-SEC-Will-Be-CloselyScrutinized-04-15-2013.
41. See, e.g., Jean Eaglesham & Chad Bray, Citi Ruling Could Chill SEC, Street Legal Pacts, WALL
ST. J. (Nov. 29, 2011), http://online.wsj.com/news/articles/SB100014240529702039356045770
66242448635560; Peter J. Henning, Behind Rakoff’s Rejection of Citigroup Settlement, N.Y. TIMES
DEALBOOK (Nov. 28, 2011, 5:14 PM), http://dealbook.nytimes.com/2011/11/28/behind-judge-rakoffsrejection-of-s-e-c-citigroup-settlement; Lattman, supra note 15.
42. Luis A. Aguilar, Comm’r, Sec. & Exch. Comm’n, Address to Practising Law Institute’s SEC
Speaks in 2011 Program: Setting Forth Aspirations for 2011 (Feb. 4, 2011), http://www.sec.gov/news/
speech/2011/spch020411laa.htm.
43. Id.
44. See Edward Wyatt, S.E.C. Changes Policy on Firms’ Admission of Guilt, N.Y. TIMES, Jan. 7,
2012, http://www.nytimes.com/2012/01/07/business/sec-to-change-policy-on-companies-admission-ofguilt.html. See generally Robert Khuzami, Public Statement by SEC Staff: Recent Policy Change, SEC
(Jan. 7, 2012), http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1365171489600 (explaining the
rationale behind and the details of the reform).
45. Stephen J. Crimmins, a former senior executive in Enforcement and a current partner at K&L
Gates LLP, characterized the move as “a big non-event.” Joshua Gallu, The SEC Stands by a
Controversial Phrase, BUSINESSWEEK (Jan. 12, 2012), http://www.businessweek.com/printer/articles/7260the-sec-stands-by-a-controversial-phrase.
46. See Press Release, House Comm. on Fin. Servs., Leaders of Financial Services Committee
Jointly Announce Hearing on SEC Settlement Practices (Dec. 16, 2011), available at http://
financialservices.house.gov/news/documentsingle.aspx?DocumentID⫽273033.
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wrote to newly confirmed SEC Chair Mary Jo White and other agency heads
requesting internal cost–benefit studies on the value of their no-admit policies.47
Through May of 2013, White defended the agency’s position.48
Then, in June, White announced the historic development that is the focus of
this Note: in certain cases of “egregious” conduct, the agency would require
admissions of wrongdoing as a non-negotiable condition of settlement.49 White
reasoned that admissions would “achieve a greater measure of public accountability, which, in turn, [would] bolster the public’s confidence in the strength and
credibility of law enforcement, and the safety of [the] markets.”50 Under the
new policy, admissions might be required where the defendant “placed investors
or the market at risk of potentially serious harm,” actually “harmed large
numbers of investors,” or “engaged in unlawful obstruction” of an SEC investigation.51 Admissions might also be required where they would “aid investors
[in] deciding whether to deal with a particular party in the future” or where
“reciting unambiguous facts would send an important message.”52 Defendants
47. Letter from Elizabeth Warren, Senator, U.S. Senate, to Ben Bernanke, Chairman, Bd. of
Governors of the Fed. Reserve Sys., Eric Holder, U.S. Attorney Gen., U.S. Dep’t of Justice, & Mary Jo
White, Chair, Sec. & Exch. Comm’n (May 14, 2013), available at http://www.warren.senate.gov/
documents/LtrtoRegulatorsre2-14-13hrg.pdf. White ordered an internal review of the SEC’s admission
policy, upon arriving at the agency. See Jean Eaglesham & Andrew Ackerman, SEC Seeks Admissions
of Fault, WALL ST. J. (June 18, 2013, 8:51 PM ET), http://online.wsj.com/news/articles/SB100
01424127887324021104578553931876196990. She also appointed George Canellos and Andrew
Ceresney—both former prosecutors—to be co-directors of Enforcement. See Press Release, Sec. &
Exch. Comm’n, George Canellos and Andrew Ceresney Named Co-Directors of Enforcement (Apr. 22,
2013), available at https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171514832; see
Ben Protess, Khuzami, S.E.C. Enforcement Chief Who Reinvigorated Unit, to Step Down, N.Y. TIMES
DEALBOOK (Jan. 9, 2013, 12:57 PM), http://dealbook.nytimes.com/2013/01/09/s-e-c-enforcement-chiefkhuzami-steps-down.
48. See Letter from Mary Jo White, Chair, Sec. & Exch. Comm’n, to Elizabeth Warren, Senator,
U.S. Senate (June 10, 2013), available at http://thinkprogress.org/wp-content/uploads/2013/06/WARRENSettling-Enforcement-Action-ES144264-Response.pdf.
49. See 2013 Mid-Year Securities Enforcement Update, GIBSON DUNN 2 (July 15, 2013), http://
www.gibsondunn.com/publications/pages/2013-Mid-Year-Securities-Enforcement-Update.aspx; Stewart, supra note 1. “[T]he majority of cases w[ould] continue to be resolved on a no admit no deny
basis . . . .” Andrew Ceresney, Co-Dir. of the Div. of Enforcement, Sec. & Exch. Comm’n, Speech
Before the American Law Institute Continuing Legal Education: Financial Reporting and Accounting
Fraud (Sept. 19, 2013), http://www.sec.gov/News/Speech/Detail/Speech/1370539845772.
50. White, supra note 3.
51. Stewart, supra note 1 (internal quotation marks omitted). These criteria are similar but opposite
to those expressed in the agency’s 2001 Seaboard Report, which delineated thirteen factors it would
consider in determining whether it would take “the extraordinary step of taking no enforcement action
to bringing reduced charges, seeking lighter sanctions, or including mitigating language in documents
[used] to announce and resolve enforcement actions.” SEC, REPORT OF INVESTIGATION PURSUANT TO
SECTION 21(A) OF THE SECURITIES EXCHANGE ACT OF 1934 AND COMMISSION STATEMENT ON THE RELATIONSHIP
OF COOPERATION TO AGENCY ENFORCEMENT DECISIONS, Exchange Act Release No. 44969 (Oct. 23, 2001),
available at http://www.sec.gov/litigation/investreport/34-44969.htm.
52. Mary Jo White, Chair, Sec. & Exch. Comm’n, Speech Before the Council of Institutional
Investors: Deploying the Full Enforcement Arsenal (Sept. 26, 2013), http://www.sec.gov/News/Speech/
Detail/Speech/1370539841202.
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identified for special treatment would be forced to either admit wrongdoing or
take the agency to trial.53
White credited Judge Rakoff for bringing the issue to the public’s attention
but flatly denied that he prompted the change.54 The agency has since elaborated on its criteria, revealing that the Commission would consider its litigation
risk and the importance of the particular case in determining whether it would
require an admission.55
The Commission wasted little time implementing its new policy. In July
2013, the Harbinger Group revealed that the Commission had rejected the terms
of an agreement negotiated between the company and SEC Enforcement staff.56
White and other commissioners had reportedly viewed the terms as lax.57 After
a second round of negotiations and approval by the Commission, the agency
filed a new settlement agreement containing the SEC’s first negotiated admission of wrongdoing.58 The agency has since continued extracting admissions
from corporate defendants, including JPMorgan Chase,59 ConvergEx Group,60
Scottrade,61 Credit Suisse Group,62 Lions Gate Entertainment,63 Bank of America,64 and Wells Fargo Advisors.65
II. EVALUATING CONSEQUENCES OF AN ADMISSION OF WRONGDOING
This Part explores several factors that must be considered in evaluating the
consequences of a corporate admission of wrongdoing in an SEC settlement.
Most notable is the possibility, studied at length in section II.A, that a corporation might be estopped from launching a full defense in a subsequent criminal
or private class action over the same misconduct. Any corporation negotiating
with the SEC in a case where Enforcement demands an admission will want to
know whether settling the charge could have calamitous legal ramifications.
Additional collateral effects are examined in section II.B, including the possibili53. Chair White has spoken about her belief that trials are valuable for helping to foster developments in law and achieve public accountability. See Mary Jo White, Chair, Sec. & Exch. Comm’n, 5th
Annual Judge Thomas A. Flannery Lecture: The Importance of Trials to the Law and Public Accountability (Nov. 14, 2013), http://www.sec.gov/News/Speech/Detail/Speech/1370540374908.
54. See Stewart, supra note 1.
55. See Eaglesham, supra note 26.
56. See Noam Noked, SEC Rejects Proposed Settlement with Harbinger Capital and Its Manager,
HARV. L. SCH. F. ON CORP. GOVERNANCE & FIN. REG. (Aug. 7, 2013, 9:30 AM), http://blogs.law.harvard.edu/
corpgov/2013/08/07/sec-rejects-proposed-settlement-with-harbinger-capital-and-its-manager.
57. See Alexandra Stevenson, Falcone to Admit to Wrongdoing as S.E.C. Takes a Harder Line, N.Y.
TIMES DEALBOOK (Aug. 19, 2013, 5:15 PM), http://dealbook.nytimes.com/2013/08/19/hedge-fundmanager-to-admit-to-wrongdoing-in-revised-deal-with-s-e-c.
58. Id.; see discussion infra section III.A.1.
59. See discussion infra section III.A.2.
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ties that factual allegations contained in a public settlement might form the basis
of a private action or that defendants might be subjected to further penalties
under federal or state laws or by self-regulatory authorities.
A. COLLATERAL ESTOPPEL
Offensive collateral estoppel, or issue preclusion, bars a defendant from
relitigating a legal or factual issue already determined against it in an earlier
action.66 Where pled successfully, a party is entitled to the benefit of findings
established in a prior judgment, and the defendant is precluded from disputing
them. This common law doctrine helps to avoid the costs of multiple lawsuits
on the same issue, promote the consistency of adjudications, and conserve
judicial resources.67 Although the states vary in their application of the doctrine’s principles, its fundamental elements are shared across jurisdictions: in
order to estop a defendant from relitigating an issue already decided against it, a
party must show that the issue was actually litigated in the prior action, was
decided in a final judgment, and was necessary to support the judgment.68 These
requirements “help ensure that [the] finding was carefully considered in the first
action” and “therefore may serve as a fair basis for estoppel.”69
Section II.A.1 discusses the unlikelihood of estoppel in subsequent criminal
proceedings. Section II.A.2 explores the doctrine of estoppel in private actions.
Section II.A.3 considers which issues fall within the scope of the preclusive
effect.
1. The Viability of Estoppel in Criminal Proceedings
The SEC is the primary authority for regulating the securities markets and
prosecuting civil violations of the securities laws, but it shares jurisdiction with
other agencies that have overlapping or supplemental prosecutorial authority.70
In the most serious cases of misconduct, the SEC conducts parallel investigations in conjunction with the Department of Justice.71 Where corporations
may be subject to criminal prosecution after settling with the SEC, defendants
must consider whether there could be collateral estoppel effects of an admission.
The judiciary has yet to encounter the opportunity, but under current doctrine
it is unlikely to estop criminal defendants from relitigating an issue settled in a
66. See BLACK’S LAW DICTIONARY 298 (9th. ed. 2009); 3 MOORE’S MANUAL: FEDERAL PRACTICE AND
PROCEDURE § 30.70[1] (3d ed. 2014); see also United States v. Mendoza, 464 U.S. 154, 158 (1984).
67. See Allen v. McCurry, 449 U.S. 90, 94 (1980).
68. See RESTATEMENT (SECOND) OF JUDGMENTS § 27 (1982). There must also be “a full and fair
opportunity for litigation in the prior proceeding,” a due process concern. SEC v. Monarch Funding
Corp., 192 F.3d 295, 304 (2d Cir. 1999).
69. Monarch Funding, 192 F.3d at 309.
70. These other agencies include, for example, the U.S. Commodity Futures Trading Commission
(CFTC) and the Financial Industry Regulatory Authority (FINRA).
71. See, e.g., Press Release, Sec. & Exch. Comm’n, U.S. Attorney and FBI Announce 13 Charged in
Connection with Securities Kickback Schemes (Dec. 1, 2011), http://www.sec.gov/news/press/2011/2011251.htm.
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prior SEC civil action by admission. A short and rather straightforward analysis
reveals why this must be so. Even where fully litigated at trial, a defendant’s
culpability under a preponderance of evidence standard does not—by definition—
indicate guilt beyond all reasonable doubt.72 It would therefore be manifestly
unfair to a defendant to preclude relitigation in a criminal action of an issue lost
in a civil proceeding.73 Accordingly, criminal prosecutors are not entitled to the
preclusive effect of a civil judgment.74
Settled actions do not of course proceed to trial, but a corporation’s decision
to settle with the SEC—an agency with civil enforcement authority only75—is
explained in part by the low standard of proof that would make a successful
defense relatively difficult.76 Due to the injustice that would arise should a court
allow a prosecutor to exploit the low burden of proof applied in an SEC
action,77 one should not expect collateral estoppel to be available in a subsequent criminal action.
2. The Viability of Estoppel in Private Actions
In a private class action, the collateral estoppel doctrine could spell devastating consequences for a corporation that has admitted to misconduct in settling
with the SEC. Consider, for example, a hypothetical corporation that swindles
investors out of $50 million and realizes $10 million in earnings from the
misconduct. If the SEC investigates and prosecutes the fraud in civil litigation,
it might recover for the victims $10 million in disgorgement, plus interest, and
persuade the court to impose a penalty of the same amount.78 The corporation,
72. See Grogan v. Garner, 498 U.S. 279, 284–85 (1991); see also Daniel Fisher, Why Settling with
the SEC Can Be Worse Than Losing at Trial, FORBES (Jan. 29, 2014, 8:13 AM), http://www.forbes.com/
sites/danielfisher/2014/01/29/why-settling-with-the-sec-can-be-worse-than-losing-at-trial (“[I]n a criminal case the fact finder must find defendant guilty [under] . . . a much higher standard.”).
73. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 330–31 (1979) (“[I]t might be unfair to apply
offensive estoppel . . . where the second action affords the defendant procedural opportunities unavailable in the first action that could readily cause a different result.”).
74. See RESTATEMENT (SECOND) OF JUDGMENTS § 28(4) (1982) (noting that relitigation is not precluded
where “the adversary has a significantly heavier burden than he had in the first action”).
75. See How Investigations Work, SEC, http://www.sec.gov/News/Article/Detail/Article/1356125
787012 (last visited Mar. 25, 2014).
76. The SEC has boasted a trial win rate of about 80% in recent years, though it declined somewhat
in the months after White’s admissions announcement. Jean Eaglesham, SEC Takes Steps to Stem
Courtroom Defeats: Trial Unit Is Restructured as Agency’s Win Rate Slips, WALL ST. J. (Feb. 13, 2014,
8:47 PM ET), http://online.wsj.com/news/articles/SB10001424052702304703804579381310253258646.
77. Fundamental conceptions of American-style, innocent-until-proven-guilty justice help explain
the significant protections afforded to defendants in criminal prosecutions. “In contrast, the burden of
persuasion in civil litigation embodies a strategy designed to minimize the number of erroneous
verdicts.” Note, A Probabilistic Analysis of the Doctrine of Mutuality of Collateral Estoppel, 76 MICH.
L. REV. 612, 622 (1978). “Absent some peculiar and cognizable virtue inhering in one of the parties,
there is no reason to prefer an error in one direction over an error in the other.” Id.
78. See Khuzami, Testimony, supra note 5 (noting that the agency can obtain disgorgement, interest,
and penalties). The SEC’s governing statutes allow for penalties in the amount of “the gross amount of
pecuniary gain” per violation, where “violation” is not defined. Securities Act of 1933 § 20(d)(2)(c), 15
U.S.C. § 77t(d)(2)(C) (2012); Securities Exchange Act of 1934 § 21(d)(3)(B), 15 U.S.C. § 78u(d)(3)(B)
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like 98% of the agency’s defendants,79 is likely to settle—for around $17
million.80 But if the defendant also admits to committing the fraud and is
subsequently sued by a private class of victims who can foil the company’s
defenses with collateral estoppel, the defendant is likely to pay nearly $50
million more, for a total of almost $67 million on its $10 million in fraudulent
earnings. Without passing judgment on the desirability of this outcome from a
public policy perspective, one can appreciate the magnitude of this disparity and
the potentially ruinous aftermath for the business. Under the traditional “no
admit, no deny” regime, by contrast, a corporate settlement with the SEC would
force a plaintiff class to actually litigate each issue for itself, drastically reducing the class’s chance of prevailing and also stripping it of leverage to negotiate
restitution through private settlement.
In evaluating the potential availability of collateral estoppel in a private
action, practitioners should understand the final judgment requirement, the
“actually litigated” requirement, fairness considerations, and the explicit intent
of the parties to the original settlement.
a. The Final Judgment Requirement. To receive the benefit of issue preclusion, a private plaintiff must show that the prior action concluded with a final
judgment.81 An SEC settlement that is finalized in a consent judgment82 issued
by a federal district court is a final judgment,83 but the SEC does not bring all of
its cases in Article III courts. As an independent agency, the SEC files many of
its actions as administrative proceedings handled by an administrative law judge
or the Commission itself.84 Under the Dodd–Frank Act of 2010, it can impose
(2012). Although the identification of multiple, discreet “violations” by a defendant could theoretically
result in penalties that are several times the gross amount of the defendant’s pecuniary gain, penalties
are generally not imposed in this way.
79. See Luis A. Aguilar, Comm’r, Sec. & Exch. Comm’n, Speech at the 20th Annual Securities
Litigation and Regulatory Enforcement Seminar: A Stronger Enforcement Program to Enhance Investor
Protection (Oct. 25, 2013), http://www.sec.gov/News/Speech/Detail/Speech/1370540071677.
80. See Khuzami, Remarks, supra note 5 (reasoning that the SEC will settle if it can extract, “say, 85
percent of what [it] might reasonably expect to get in trial”).
81. See, e.g., RESTATEMENT (SECOND) OF JUDGMENTS § 27 (1982).
82. A consent judgment, also known as an agreed or stipulated judgment, is “[a] settlement that
becomes a court judgment when the judge sanctions it. In effect, [it] is merely a contract acknowledged
in open court and ordered to be recorded, but it binds the parties as fully as other judgments.” BLACK’S
LAW DICTIONARY 918 (9th ed. 2009).
83.
[F]inality for purposes of issue preclusion is not synonymous with finality for purposes of the
statutory appealability of a judgment . . . . [T]here is no requirement that the judgment ends
the litigation and leaves nothing for the court to do but execute the judgment. Rather, for
purposes of issue preclusion, the term ‘final judgment’ includes any prior adjudication of an
issue in another action that is determined to be sufficiently firm to have conclusive effect.
3 MOORE’S MANUAL, supra note 66, § 30.76[1].
84. See Letter from Mary L. Schapiro, Chairman, Sec. & Exch. Comm’n, to Jack Reed, Chairman,
Senate Subcomm. on Sec., Ins. & Inv. 2 (Nov. 28, 2011), available at http://www.davispolk.com/files/
uploads/IMG/Mary-Schapiro—Letter-to-Senator-Jack-Reed.pdf; The Investor’s Advocate: How the SEC
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civil monetary penalties in administrative proceedings to the same extent that it
can seek them in federal court.85 And though administrative proceedings are
generally appealable in federal court, settled actions are not.86 Particularly at a
time when federal judges have been questioning or rejecting settlements negotiated between defendants and the Enforcement staff, the agency has significant
incentive to eschew federal court altogether and instead finalize settlements by
Commission order.87 For defendants of enforcement actions, whether a settlement offer accepted by Commission order can be considered a “final judgment”
for purposes of the collateral estoppel doctrine is therefore a question of
paramount importance. If it cannot, a defendant need only ensure that its case be
resolved administratively, in order to discharge all its risk of collateral estoppel
in a follow-up private suit.
Courts may give preclusive effect to administrative findings so long as the
“agency [was] acting in a judicial capacity”—as opposed to a legislative or
rulemaking capacity—and “resolve[d] disputed issues of fact properly before it
which the parties have had an adequate opportunity to litigate.”88 The Commission accepts settlements by administrative order under Sections 15(b) or 21C of
the ’34 Act.89 Section 15(b) provides that the Commission shall penalize any
broker or dealer “if it finds, on the record after notice and opportunity for
hearing,” that the defendant willfully violated the antifraud statues and that a
penalty would be in the public interest.90 Similarly, Section 21C provides that
the Commission may make findings and order any person to cease and desist
misconduct if it “finds, after notice and opportunity for hearing,” that the
defendant violated the securities laws.91 Because these governing statutes indicate that the agency acts in its judicial capacity when it finalizes its settlements,
its findings may be given preclusive effect.92 Therefore, after any settlement
with the SEC, the final judgment requirement would be satisfied for purposes of
collateral estoppel.
Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, SEC, http://
www.sec.gov/about/whatwedo.shtml (last modified June 10, 2013). See generally GIBSON DUNN, supra
note 49, at 2 (noting that “administrative proceedings provide far fewer rights to the parties (i.e. no jury
trial, limited or no discovery)”).
85. See Peter J. Henning, S.E.C. Seeks More Power, but Does It Need It?, N.Y. TIMES DEALBOOK
(Dec. 5, 2011, 4:05 PM), http://dealbook.nytimes.com/2011/12/05/s-e-c-seeks-more-power-but-does-itneed-it. Under the Sarbanes–Oxley Act of 2002, the SEC may also impose director and officer bars by
administrative cease-and-desist order rather than Article III judgment. See Jayne W. Barnard, SEC
Debarment of Officers and Directors After Sarbanes–Oxley, 59 BUS. LAW. 391, 392 (2004).
86. See 15 U.S.C. § 78y(a)(1) (2012); see also Henning, supra note 85.
87. See GIBSON DUNN, supra note 49, at 3.
88. Univ. of Tenn. v. Elliott, 478 U.S. 788, 797–98 (1986) (quoting United States v. Utah Constr. &
Mining Co., 384 U.S. 394, 422 (1966)); see Ohio Bell Tel. Co. v. Pub. Utils. Comm’n of Ohio, 844 F.
Supp. 2d 873, 881 (S.D. Ohio 2012); see also 3 MOORE’S MANUAL, supra note 66, § 30.77[5].
89. See, e.g., Scottrade, Inc., Exchange Act Release No. 71,435, 2014 WL 316743 (Jan. 29, 2014).
90. 15 U.S.C. § 78o(b)(4) (2012).
91. 15 U.S.C. § 78u-3(a) (2012).
92. See Elliott, 478 U.S. at 797–98.
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b. The “Actually Litigated” Requirement. In order to obtain the benefits of
issue preclusion in any particular case, a plaintiff customarily must demonstrate
that the issue was “actually litigated” in the prior action.93 Several wellrespected attorneys and academics have maintained that SEC settlements cannot
trigger collateral estoppel, absent express intent, because they are not actually
litigated94—a premise that draws support from the Restatement (Second).95
Alas, this seemingly common sense conclusion may not be correct.96 It is true
that a substantial body of case law holds that consent judgments are not actually
litigated.97 However, a considerable subset of these cases also suggests that
93. See, e.g., Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979); Kennedy v. MendozaMartinez, 372 U.S. 144, 155–58 (1963); see also Bobby v. Bies, 556 U.S. 825, 834 (2009) (“If a
judgment does not depend on a given determination, relitigation of that determination is not precluded.”).
94. See, e.g., John C. Coffee, Jr., ‘Neither Admit Nor Deny’: Practical Implications of SEC’s New
Policy, CLS BLUE SKY BLOG (July 22, 2013), http://clsbluesky.law.columbia.edu/2013/07/22/neither-admitnor-deny-practical-implications-of-secs-new-policy; Mei Lin Kwan-Gett et al., Assessing the SEC’s
New ‘Neither Admit Nor Deny’ Policy, N.Y. L.J. (Oct. 9, 2012), http://www.willkie.com//media/Files/
Publications/2012/10/Assessing%20the%20SECs%20New%20Neither%20Admit%20Nor%20Deny%
20Po__/Files/AssessingtheSECNewPolicypdf/FileAttachment/Assessing_the_SEC_New_Policy.pdf; see
also RICHARD H. FIELD ET AL., CIVIL PROCEDURE: MATERIALS FOR A BASIC COURSE 735 (10th ed. 2010).
95. See RESTATEMENT (SECOND) OF JUDGMENTS § 27 cmt. e (1982) (“In the case of a judgment entered
by confession, consent, or default, none of the issues is actually litigated.”); 3 MOORE’S MANUAL, supra
note 66, § 30.73[1][c][ii] (“[I]ssue preclusion generally does not apply” to consent judgments because
“none of the issues is actually litigated at a hearing or other determination of the merits by the court
itself.”).
96. FIELD ET AL., supra note 94, at 735 (“[I]n some states, apparently a minority, the law is otherwise . . . .”).
97. See, e.g., Arizona v. California, 530 U.S. 392, 414 (2000) (citing the Restatement with approval);
United States v. Int’l Bldg. Co., 345 U.S. 502, 506 (1953) (reasoning that a consent judgment “has no
greater dignity, so far as collateral estoppel is concerned, than any judgment entered only as a
compromise of the parties”); Nichols v. Bd. of Cnty. Comm’rs, 506 F.3d 962, 968 (10th Cir. 2007)
(holding that a settlement by consent judgment is not “actually determined by the adjudicatory body”
and thus cannot afford preclusive effect (citations omitted) (internal quotations marks omitted));
Avondale Shipyards, Inc. v. Insured Lloyd’s, 786 F.2d 1265, 1273 (5th Cir. 1986) (noting that consent
judgments “normally lack ‘the requisite . . . judicial determination of issues’”(quoting 1B JAMES WM.
MOORE ET AL., MOORE’S FEDERAL PRACTICE ¶ 0.444[3] (2d ed. 1992))); Eichman v. Fotomat Corp., 759
F.2d 1434, 1437 (9th Cir. 1985) (reasoning that under California law, “the element of litigated issues is
absent”); Otherson v. Dep’t of Justice, INS, 711 F.2d 267, 274 (D.C. Cir. 1983) (“[W]hen a particular
fact is established not by judicial resolution but by stipulation of the parties, that fact has not been
‘actually litigated’ and thus is not a proper candidate for issue preclusion.”); Lipsky v. Commonwealth
United Corp., 551 F.2d 887, 893 (2d Cir. 1976) (holding that an SEC consent judgment is “between a
federal agency and a private corporation [and] is not the result of an actual adjudication of any of the
issues”); Seaboard Air Line R.R. Co. v. George F. McCourt Trucking, Inc., 277 F.2d 593, 597 (5th Cir.
1960) (reasoning that a consent judgment is “a nonlitigated, court-approved compromise effectuated to
avoid the risk of litigation”); Boswell v. Colloid Envtl. Techs. Co., 236 F.R.D. 682, 690 (D. Wyo. 2006)
(applying Nebraska law and holding that for collateral estoppel, the issues must be litigated, not
stipulated, in order to foster compromise without the risk of unforeseen adverse impacts); Kentuckians
for the Commonwealth, Inc. v. Rivenburgh, 206 F. Supp. 2d 782, 798 (S.D. W. Va. 2002) (holding that
claims “disposed of in a court-approved settlement . . . were not litigated”), vacated, 317 F.3d 425 (4th
Cir. 2003); In re Cenco Inc. Sec. Litig., 529 F. Supp. 411, 418 (N.D. Ill. 1982) (“[A] settlement
agreement, like a consent decree, does not have collateral estoppel effect.”); In re Gen. Adjudication of
All Rights to Use Water in Gila, 127 P.3d 882, 888 n.8 (Ariz. 2006); Landeros v. Pankey, 46 Cal. Rptr.
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where a party has made an explicit admission in settlement, the customary
requirement of actual litigation might not apply.98 In other words, courts have
yet to address the specific question of whether an allegation need still be
actually litigated if a party admits it is true, but many judges in dicta have
suggested that it need not. In making admissions, corporations run the risk that
at least some courts will dispense with the requirement of actual litigation and
pave a new frontier of collateral estoppel jurisprudence. Thus, in negotiating
settlements with the SEC, defendants cannot rely with confidence on the
judiciary’s past disinclination to afford preclusive effect to consent judgments.
To shield themselves from unanticipated collateral consequences, corporations
must consider other avenues for protection.
In a third class of cases, judges—including Judge Rakoff—have estopped
parties from relitigating issues based on facts alleged in a settlement but
not expressly admitted.99 Here, the legal groundwork is routinely shallow or
2d 165, 167–68 (Cal. Ct. App. 1995); Welsh v. Gerber Prods., Inc., 555 A.2d 486, 492 (Md. 1989);
Angel v. Bank of Tokyo–Mitsubishi, Ltd., 835 N.Y.S.2d 57, 61 (N.Y. App. Div. 2007).
98. See 3 MOORE’S MANUAL, supra note 66 § 30.73[1][c][ii] (noting that a consent judgment may be
given preclusive effect “[i]f the parties to [the] consent decree express clearly the intention that the
decree to be entered does not only terminate the litigation of claims, but also determines finally certain
issues”); see also Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1159 (9th Cir. 2002) (“A
voluntary dismissal of a claim prior to any adjudication and without any stipulated findings of fact does
not actually litigate any issue.” (emphasis added)); Whelan v. Abell, 48 F.3d 1247, 1256 (D.C. Cir.
1995) (reasoning that the party “did not admit having committed any of the violations . . . alleged”
(emphasis added)); Kaspar Wire Works, Inc. v. Leco Eng’g & Mach., Inc., 575 F.2d 530, 540 (5th Cir.
1978) (“[T]he parties may create an estoppel to contest patent validity if, in the consent decree, they
expressly stipulate that the patent is valid and has been infringed.” (emphasis added)); In re Cenco Inc.
Sec. Litig., 529 F. Supp. at 416 (“The persuasive weight of authority declines to ascribe preclusive
effect to consent decrees when there has been no admission of liability . . . .” (emphasis added)); Ste.
Genevieve Cnty. v. Fox, 688 S.W.2d 392, 395 n.2 (Mo. Ct. App. 1985) (holding that collateral estoppel
did not apply, because “there was no stipulation as to liability or any other fact which might have been
determined had there been a trial” (emphasis added)).
99. See, e.g., Richman v. Goldman Sachs Grp., Inc., 868 F. Supp. 2d 261, 278 (S.D.N.Y. 2012)
(Rakoff, J.) (implicitly invoking collateral estoppel principles in holding that Goldman Sachs’ “assertion that it ‘neither admitted, nor denied’ that its Abacus disclosures were fraudulent is eviscerated by
its concession” in an SEC consent judgment that it made this “mistake”); Doe ex rel. Doe v. Sch. Bd.,
711 F. Supp. 2d 1325, 1329 n.9 (N.D. Fla. 2010) (“The principles of res judicata and collateral estoppel
apply to consent decrees as well as to ordinary judgments entered by a court.” (quoting United States v.
Jefferson Cnty., 720 F.2d 1511, 1517 (11th Cir. 1983)) (internal quotation marks omitted)); Buzzanco v.
Lord Corp., 173 F. Supp. 2d 376, 385 (W.D. Pa. 2001) (“A final judgment that is the result of the
parties’ stipulation is a final judgment on the merits for purposes of collateral estoppel so long as the
parties intended it to resolve all issues raised in the action.”); Klinker v. Klinker, 283 P.2d 83, 88 (Cal.
Ct. App. 1955) (“A judgment rendered on a stipulation is conclusive of everything adjudicated by
it . . . .”); Gutherie v. Ford Equip. Leasing Co., 498 S.E.2d 797, 799 (Ga. Ct. App. 1998) (reasoning that
“all issues . . . are matters which would have necessarily had to have been adjudicated in order for the
parties’ . . . previous consent judgment to be validly rendered”); Neville v. Hennigh, 522 P.2d 443, 443
(Kan. 1974) (“A judgment entered by consent of the parties or their attorneys is as conclusive on
matters in issue as one rendered after contest and trial.”); MPC, Inc. v. Kenny, 367 A.2d 486, 490 (Md.
1977) (“The result is the same [for a consent judgment], for purposes of this case, as it would have been
in the event of a general verdict at the hands of a jury.”); Travelers Ins. Co. v. Godsey, 273 A.2d 431,
435 (Md. 1971) (upholding “[t]he old and still generally prevailing rule . . . that a judgment by consent
is as sound a base on which to ground collateral estoppel as a judgment after an adversary trial” but
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449
absent altogether, and the decisions are unlikely to withstand deep judicial
scrutiny.
c. Fairness Considerations. If a private plaintiff is successful in satisfying the
basic requirements for collateral estoppel, a court might decline to afford
preclusive effect for policy reasons. The leading case in this realm is Parklane
Hoisery Co. v. Shore.100 In Parklane, the SEC charged the defendant with
issuing a materially false and misleading proxy statement.101 After the agency
won at trial, stockholders brought a class action against the company, invoked
offensive collateral estoppel, and moved for partial summary judgment.102 The
Supreme Court estopped the defendant from presenting a complete defense.103
Most pertinent was the Court’s directive that trial courts should be afforded
“broad discretion to determine” whether estoppel is appropriate, so long as its
application is not “unfair” to the defendant.104 Situations giving rise to unfairness include those where “the second action affords the defendant procedural
opportunities unavailable in the first action”—such as a higher burden of
proof—“that could readily cause a different result” and where the defendant had
“little incentive to defend vigorously” in the prior action due to small damages,
“particularly [where] future suits [were] not foreseeable.”105
One could argue that collateral estoppel based on an SEC settlement should
be unavailable under the Parklane standard of unfairness. The damages currently obtainable by the agency—disgorgement plus a penalty of equal measure106—often pale in comparison to those obtainable by private plaintiffs for
acknowledging more recent cases and scholarship endorsing a contrary position); Pub. Serv. Elec. &
Gas Co. v. Waldroup, 119 A.2d 172, 176 (N.J. Super. Ct. App. Div. 1955) (“[A] general judgment
entered by consent should have as great if not greater adjudicative efficacy as to all of the questions in
issue as one entered after a trial.”); Lowell v. Manhattan & Bronx Surface Transit Operating Auth., 622
N.Y.S.2d 200, 201 (N.Y. Sup. Ct. 1994) (“Defendant cannot now contend that because it entered into a
consent award that it was not a ‘determination’ and that it did not have the opportunity to oppose the
plaintiff for it had the opportunity to do so.”).
100. 439 U.S. 322 (1979). The alleged offenses included violations of Section 17(a) and Rule 10b-5.
Id. at 324. For a discussion of the antifraud statutes, see infra section II.A.3.
101. Parklane, 439 U.S. at 324.
102. Id. at 324–25.
103. Id. at 332–33.
104. Id. at 331.
105. Id. at 330–31; accord RESTATEMENT (SECOND) OF JUDGMENTS § 28(5) cmt. j (1982).
106. Under parallel provisions of the ’33 Act and ’34 Act, the SEC can recover ill-gotten gains
(disgorgement) and impose a penalty of the same amount. See Securities Exchange Act of 1933
§ 20(d)(2), 15 U.S.C. § 77t(d)(2)(C) (2012); Securities Exchange Act of 1934 § 21(d)(3)(B), 15 U.S.C.
§ 78u(d)(3)(B) (2012). Both Chairman Schapiro and Chair White have sought additional authority from
Congress to obtain penalties equal to the greater of investor losses or three times ill-gotten gains.
Schapiro, supra note 84; White, supra note 52; see also Khuzami, Remarks, supra note 5 (“[W]e
cannot seek a penalty larger than the financial gain a wrongdoer made as a result of the violation, even
if the loss caused to investors is substantially greater than those ill-gotten gains.”). For an example of
pending legislation, see Stronger Enforcement of Civil Penalties Act of 2013, S. 286, 113th Cong.
(2013). See generally Aguilar, supra note 79 (“The fallacy of focusing on corporate benefit as a
dominant factor in assessing penalties was laid bare by a number of cases during the financial crisis
450
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actual losses,107 and in a vacuum a corporation might find that it makes good
business sense to fold to the SEC rather than defend vigorously and expose
itself to the enormous costs and public risks associated with taking the agency
to trial.108 By this logic, subjecting the corporation to massive damages in a
follow-up suit by private plaintiffs seems patently unfair. But corporations do
not negotiate in a vacuum; the expectation of a follow-up private action is
standard practice due to the regularity with which victims sue corporations after
SEC securities fraud charges. Unless circumstances are such that a private
action somehow blindsides a defendant corporation, a court is unlikely to find
unfairness based on the unforeseeability of a private suit.
The more important foreseeability question is the foreseeability that collateral
estoppel would be applied against a defendant based on its admissions in
settlement with the SEC.109 That is, if corporations find “little incentive to
defend vigorously” in the first action by reason that the doctrine has not
generally been applied in this way, courts should be hard pressed to find that
estoppel is fair.110 A chicken-and-egg problem results. Which must come first:
the vigorous defense or the application of collateral estoppel based on an SEC
settlement? Here, the plethora of commentary and dicta associating admissions
with estoppel—even if lacking in legal precedent—may become a self-fulfilling
prophecy.111 If courts determine that corporations are now effectively on notice
that private plaintiffs might use their admissions for preclusive effect, courts
where a company’s fraudulent misrepresentations resulted in relatively small benefits to a company but
caused enormous losses to investors.”).
107. Private litigants may recover an amount up to their actual losses. See Securities Exchange Act
of 1934 § 28(a), 15 U.S.C. § 77www(b) (2012); Private Securities Litigation Reform Act § 21D(e), 15
U.S.C. § 78u-4(e)(1) (2012) (In cases where the “plaintiff seeks to establish damages by reference to
the market price of a security,” damages are capped at the difference between the plaintiff’s purchase or
sale price and the average trading price from the day corrective disclosures were made to 90 days
afterward.); see also, e.g., SEC v. Citigroup Global Mkts. Inc., 827 F. Supp. 2d 328, 329 (S.D.N.Y.
2011) (noting that “Citigroup realized net profits of around $160 million,” but investors “lost more than
$700 million”).
108. A loss at trial would also provide a sure basis for collateral estoppel.
109. See Hyman v. Regenstein, 258 F.2d 502, 511 (5th Cir. 1958) (“[C]ollateral estoppel by
judgment is applicable only when . . . it was foreseeable that the fact would be of importance in
possible future litigation.”).
110. Parklane, 439 U.S. at 330; see FIELD ET AL., supra note 94, at 749 (“Today, a typical court will
not apply issue preclusion if such application was unforeseeable at the time of the initial action and
such unforeseeability may have affected the effort therein by the party sought to be precluded. But such
exceptional cases should be rare, and relitigation should follow only a clear and convincing showing of
need.”); see also RESTATEMENT (SECOND) OF JUDGMENTS § 28(5) (1982) (noting that relitigation is not
precluded where “it was not sufficiently foreseeable at the time of the initial action that the issue would
arise in the context of a subsequent action”).
111. See, e.g., SEC v. Vitesse Semiconductor Corp., 771 F. Supp. 2d 304, 308 (S.D.N.Y. 2011)
(Rakoff, J.); Marc Fagel, The SEC’s Troubling New Policy Requiring Admissions, 45 SEC. REG. & L.
REP. (BNA) 1172 (June 24, 2013), available at http://www.gibsondunn.com/publications/Documents/
Fagel-SECs-Troubling-New-Policy-Requiring-Admissions.pdf; Alison Frankel, How Harbinger Admissions to SEC Will Impact Investors’ Class Action, REUTERS (Aug. 20, 2013), http://blogs.reuters.com/
alison-frankel/2013/08/20/how-harbinger-admissions-to-sec-will-impact-investors-class-action; SEC
Enforcement Year in Review, SHEARMAN & STERLING LLP 6 (Jan. 2014), http://www.shearman.com//media/
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451
might find that estoppel is not unfair. Ultimately, a defendant corporation would
be unwise to assume definitively that collateral estoppel would be unavailable,
as a matter of court discretion.
d. Contract Theory and Bargained-For Outcomes. A settlement is—in essence—a contract between parties to resolve the issues before them, and
therefore its usage must generally be governed by the meaning its parties
intended.112 Accordingly, the overarching “key to determining whether a consent decree collaterally estops a party from relitigating . . . is whether the parties
to [it] intended their agreement to have preclusive effect.”113 In cases where the
settlement manifests no obvious intent, contract theory informs a general presumption against collateral estoppel.114 As a corollary, where a settlement’s
terms make clear that “the parties [to the prior action] have so agreed,”
plaintiffs should be entitled to the preclusive effects of an admission.115
In practice, it is highly unlikely that a defendant corporation would ever agree
to a term allowing for issue preclusion where a subsequent private action is
possible. The mission of damage control would not be well served by an open
invitation to the securities litigation bar to come and sue for easy cash. If the
parties to settlement do provide some explicit term, it would more likely specify
that issue preclusion shall not be available based on findings admitted in the
settlement. This would serve the SEC’s interest in holding the defendant
accountable in the present action, while releasing the corporation from future
estoppel risks. But the SEC may itself be unwilling to assist a defendant in this
way because the agency might come under intense criticism for so plainly
letting the corporation off the hook.
Where the parties to the settlement refrain from setting forth explicit terms
regarding the binding effect of the defendant’s admissions, a court would be
left to interpret the parties’ intent. An “intention [for issue preclusion] should
not readily be inferred,” but a risk of collateral estoppel would remain where the
parties fail to confront the matter explicitly themselves.116
Files/NewsInsights/Publications/2014/01/SECEnforcementYearinReview2013Litigation021114.pdf; Coffee, supra note 94; GIBSON DUNN, supra note 49, at 2.
112. See FIELD ET AL., supra note 94, at 735.
113. In re Chinnery, 181 B.R. 954, 960 (Bankr. W.D. Mo. 1995).
114. See RESTATEMENT (SECOND) OF JUDGMENTS § 17 Reporter’s Note (1982) (“[S]uch an intention
should not readily be inferred.”).
115. Id. § 27 cmt. e (“The judgment may be conclusive . . . if the parties have entered an agreement
manifesting such an intention.”); see S. Pac. Commc’ns Co. v. Am. Tel. & Tel. Co., 740 F.2d 1011,
1021 (D.C. Cir. 1984) (“Some courts have given collateral estoppel effect to consent judgments. . . .
when ‘it is clear that the parties intended the stipulation of settlement and judgment entered thereon to
adjudicate once and for all the issues raised in that action.’” (citations omitted)); see also, e.g., Green v.
Ancora-Citronelle Corp., 577 F.2d 1380, 1383 (9th Cir. 1978).
116. RESTATEMENT (SECOND) OF JUDGMENTS § 17 Reporter’s Note (1982).
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3. Determining the Scope of the Preclusive Effect
If a court gives preclusive effect to an admission in an SEC settlement of
securities fraud, the critical next question is what issues the defendant will be
estopped from relitigating. The securities laws contain two workhorse provisions that are markedly similar and that account for the vast majority of
violations. Section 17(a) of the ’33 Act prohibits any (1) material misrepresentation or omission (2) in connection with the offer or sale of a security and (3)
made with negligence.117 Only the SEC may sue under this provision. Analogously, Rule 10b-5, promulgated pursuant to Section 10(b) of the ’34 Act,
prohibits any (1) material misrepresentation or omission (2) in connection with
the purchase or sale of a security and (3) made with knowledge or recklessness
(scienter).118 Private plaintiffs may sue under Rule 10b-5, but they must prove
three additional elements: (4) reliance, (5) economic loss, and (6) loss causation.119 Materiality, scienter, and reliance are the hardest elements to prove and
are generally the focus of any private 10b-5 suit.120 In its prosecutions, the SEC
alleges violations of both 17(a) and 10b-5 wherever possible, but where the
agency lacks evidence of actual knowledge or recklessness, it can plausibly
allege a violation of 17(a) only.
For a visual presentation of these rights of action, consult Table 1 below.
Issue preclusion applies to legal issues that are not “significantly different”
between the prior and subsequent actions.121 By reference to Table 1 above, it is
evident that if the SEC files a 17(a) action and the defendant admits to a
complete violation, a private plaintiff may estop the defendant from relitigating
elements 1 and 2—but not element 3, because negligence and scienter are
significantly different degrees of intent. By contrast, if the SEC files a 10b-5
action and the defendant admits to a violation, a private plaintiff may estop the
defendant from relitigating elements 1, 2, and 3. So long as the plaintiff class
can prove reliance on the material misstatement or omission, victory is practically assured.122 Notwithstanding the above, if the corporation admits to a
117. See, e.g., Rubin v. United States, 449 U.S. 424, 427–28 (1981); Weiss v. SEC, 468 F.3d 849,
855 (D.C. Cir. 2006). More accurately, these are the elements of Sections 17(a)(2) and 17(a)(3).
118. See SEC v. Familant, 910 F. Supp. 2d 83, 92 (D.D.C. 2012).
119. See Stoneridge Inv. Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148, 157 (2008).
120. See Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2184 (2011) (“Whether
common questions of law or fact predominate in [a potential class] action often turns on the element of
reliance.”); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007) (“A complaint will
survive [a motion to dismiss for failure to state a claim upon which relief can be granted] . . . only if a
reasonable person would deem the inference of scienter cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.”); SEC v. Geon Indus., Inc., 531 F.2d 39, 47
(2d Cir. 1976) (explaining that the question of materiality in “each case must be approached on its own
facts”).
121. 3 MOORE’S MANUAL, supra note 66, § 30.72[5].
122. Until recently, plaintiffs were entitled a presumption of reliance that could not be rebutted until
the merits stage of litigation. In June 2014, however, the Supreme Court dealt a blow to plaintiffs by
allowing defendants to rebut the presumption prior to class certification. See Halliburton Co. v. Erica P.
John Fund, Inc., 134 S. Ct. 2398, 2404 (2014).
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453
Table 1: Elements of the Standard Securities Fraud Rights of Action
Section 17(a)
SEC action
Rule 10b-5
SEC action
1 material*
misrepresentation or
ommission
material*
ommission
Rule 10b-5
Private action
material*
ommission
2 in connection with the in connection with the
in connection with the
purchase or sale of a
offer or sale of a security
offer or sale of a security
security
3 negligence
scienter*
scienter*
4
—
—
reliance*
5
—
—
economic loss
6
—
—
loss causation
* denotes a central element in dispute in a typical claim
violation of 17(a) or 10b-5 but conspicuously fails to identify the misstatement
or omission giving rise to the violation, the plaintiff would probably find it
impossible to prove reliance thereon. The admission would be worthless for
collateral estoppel purposes. And finally, if the corporation admits to a violation
of the securities laws but to no statute or rule in particular, there would be no
identifiable issue on which to estop relitigation.123 Accordingly, from a legal
standpoint, the scope of any admission of law is nearly as important as the
admission itself.124
Issue preclusion applies to factual issues that are “identical” between the
prior and subsequent actions.125 Assuming a private plaintiff sues the defendant
corporation for the same fraudulent misconduct that was the subject of the
original SEC action, the factual issues would not be any different. Therefore, all
relevant factual admissions would likely have preclusive effect in the subsequent private suit.
B. OTHER COLLATERAL CONSEQUENCES
Although a complete assessment of other collateral consequences is beyond
the scope of this Note, a brief mention of two further risks to the corporation is
123. See Michael Bobelian, JPMorgan’s Admission of Wrongdoing May Help Class Action Plaintiffs,
FORBES (Nov. 21, 2013, 1:40 PM), http://www.forbes.com/sites/michaelbobelian/2013/11/21/what-dojpmorgans-admissions-mean (“A general admission of wrongdoing . . . will not help JPMorgan’s legal
adversaries.”).
124. See Coffee, supra note 94 (predicting that defendants could “seek to negotiate an admission
that effectively admits nothing”).
125. 3 MOORE’S MANUAL, supra note 66, § 30.72[4].
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necessary to appreciate the context of the decision analysis. To the extent that
this section fails to evaluate those risks, it serves to highlight important issues
for further research.
First, the factual allegations contained in an SEC settlement may form the
basis of a private action.126 Because a corporation can readily dispose of a
lawsuit that fails to state a plausible claim, under Federal Rule of Civil
Procedure 12(b)(6),127 it has a significant interest in limiting the amount of
unfavorable information disclosed to the public by the SEC. This would restrict
the private plaintiff’s ability to formulate a narrative of misconduct. Combined
with heightened pleading standards for private actions imposed by the Private
Securities Litigation Reform Act (PSLRA) of 1995, limiting disclosures would
pose a serious obstacle to any private plaintiff’s ability to successfully sue.128
The PSLRA requires private plaintiffs to state in their complaint—well before
the opportunity of discovery—enough facts to allow “a reasonable person [to]
deem [it] cogent and at least as compelling as any opposing inference” that the
defendant acted with scienter.129
Fortunately for the defendant, it has meaningful opportunity during settlement negotiations to influence which investigatory findings the SEC will ultimately disclose to the public, as a consequence of the agency’s policy of filing
and settling its actions simultaneously where possible.130 One can imagine that
in confidential negotiations, admissions confer a significant bargaining chip that
companies can trade away in exchange for fewer incriminating disclosures.131 If
so, settlements that contain admissions may be—compared with their “no
admit, no deny” counterparts—less illuminating on the whole about the full
extent of wrongdoing.
Second, an admission may precipitate further penalties or disqualifications by
state licensing boards, self-regulatory organizations, or other authorities.132 For
example, as a collateral consequence of his admission to the SEC, Harbinger
Capital founder Philip Falcone was barred from serving as an officer or director
126. See Bobelian, supra note 123 (noting that securities class actions “often make allegations that
mirror the government’s accusations against a company” and “piggyback on the government’s findings”).
127. See FED. R. CIV. P. 12(b)(6). Defendants in their individual capacities and corporate lawyers
also have significant motive to insulate themselves and their affiliates from financial or professional
harms that would likely result from reputationally damaging disclosures.
128. See Fisher, supra note 72.
129. Id. (internal quotation marks omitted). For an explanation of scienter, this element of securities
fraud under Rule 10b-5, see supra section II.A.3.
130. See Coffee, supra note 94; Fagel, supra note 111, at 3; see also, e.g., Press Release, Sec. &
Exch. Comm’n, SEC Charges ConvergEx Subsidiaries with Fraud for Deceiving Customers About
Commissions (Dec. 18, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/
1370540521484.
131. See Fagel, supra note 111, at 4; see also CORP. CRIME REP., supra note 5.
132. See, e.g., Alexandra Stevenson & Ben Protess, Legal Side Effect in Admission of Wrongdoing to
the S.E.C., N.Y. TIMES DEALBOOK (Oct. 7, 2013, 12:32 PM), http://dealbook.nytimes.com/2013/10/07/newyork-regulator-bans-falcone-from-insurance-business; Fisher, supra note 72.
2015]
455
of an insurance company owned by Harbinger Group and banned from controlling any New York-licensed insurance company for seven years.133
Though typically less serious than the ramifications of issue preclusion, these
consequences deserve special attention and could become chief sources of
discomfort, should the risk of collateral estoppel be effectively controlled.
III. CASE STUDIES AND OBSERVATIONS
In each of the first eight negotiated settlements containing corporate admissions, Enforcement staff has permitted the defendant to discharge its risk of
collateral estoppel. This Part assesses the eight admissions on their own terms
while drawing on Parts I and II for factual and legal context. Section III.A
approaches each settlement as a case study. Section III.B synthesizes these
observations to unravel the SEC’s new admissions policy on a more granular
level.
A. CASE STUDIES
1. Harbinger Capital
On June 27, 2012, the SEC sued hedge fund Harbinger Capital and its
founder Philip Falcone in federal district court, alleging various offenses including violations of Section 17(a) and Rule 10b-5.134 According to the complaint,
the defendants misappropriated $113.2 million from the fund as a loan to
Falcone for personal taxes and also granted undisclosed, ultra vires, preferential
liquidity terms to certain large investors as quid pro quo for their vote to restrict
other investors’ redemptions.135 After reaching a settlement in principle with
Enforcement, holding company Harbinger Group announced in a regulatory
filing dated July 19, 2013, that the Commission had rejected the terms of
settlement negotiated by its own Enforcement staff.136 The Commission reportedly viewed its terms as lax.137
With a mandate to extract the first admission of wrongdoing under the
agency’s new settlement policy, Enforcement negotiated a new draft settlement,
dated August 16, 2013, requiring payments of $6.5 million in disgorgement,
plus interest, and $10.5 million in penalties.138 In the preliminary agreement,
the defendants (1) admitted all facts alleged in a 3,100-word annex, (2) admitted
133. See Stevenson & Protess, supra note 132.
134. Complaint at 2–3, SEC v. Harbinger Capital Partners LLC, No. 12-5028 (S.D.N.Y. June 27,
2012).
135. Id. at 1–2.
136. See Noked, supra note 56.
137. See Stevenson, supra note 57.
138. Consent of Defendants at 17, SEC v. Harbinger Capital Partners LLC, No. 12-5028 (S.D.N.Y.
Aug. 16, 2013) [hereinafter Consent]. Harbinger Capital and Falcone agreed to pay $3 million and
$4 million in penalties, respectively. See Final Consent Judgment at 17–18, SEC v. Harbinger Capital
Partners LLC, No. 12-5028 (S.D.N.Y. Sept. 16, 2013) [hereinafter Final Consent Judgment]. Two
additional defendants agreed to pay the remainder. Id.
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[Vol. 103:433
that they “acted recklessly” “[i]n connection with the violations described,” (3)
agreed not to deny the allegations to the public, and (4) reserved the “right to
take legal or factual positions in litigation or other legal proceedings in which
the Commission is not a party.”139 This fourth term may have been an attempt
by the parties to explicitly foreclose the possibility of issue preclusion based on
the defendants’ admissions. In any event, the term did not appear in the final
consent judgment, dated September 16, 2013, nor did the defendants ultimately
agree not to deny the allegations to the public.140 Thus, sometime between the
draft and final settlements, the agency dropped the very term that has served as
the linchpin of its admissions policy.141 The Harbinger defendants also dropped
the term disallowing issue preclusion based on the settlement.142
With regard to the prohibition on issue preclusion, the Harbinger defendants
probably did not expect to encounter a subsequent private action arising out of
the same misconduct. Although a class of investors had filed relevant claims
against Harbinger Capital in the Southern District of New York, these claims
were dismissed, with prejudice, on September 30, 2013.143 At the time that they
were negotiating their settlement with the Enforcement staff, the Harbinger
defendants may have sensed that the class action was drawing to a close.144
Though it probably did not expect another private action, Harbinger hedged
its bet by admitting only that it “acted recklessly” “in connection with the
violations,” without specifying what provisions it violated or identifying particular misstatements or omissions that were reckless. It is likely that no private
litigant, therefore, could prove reliance thereon or estop Harbinger from relitigating materiality.145 To a private litigant, Harbinger’s admissions of law were
useless.
2. JPMorgan Chase
On September 19, 2013, the SEC simultaneously announced and settled
charges against JPMorgan Chase by order of the Commission.146 According to a
9,100-word section of facts alleged by the Commission but not admitted by the
defendant, JPMorgan maintained an inadequate system of internal controls that
failed to detect and address $4 billion out of $6 billion in trading losses in a
139. Consent, supra note 138, at 2, 5, 18.
140. See Final Consent Judgment, supra note 138.
141. See discussion supra section I.A.
142. See discussion supra section II.A.2.d.
143. In re Harbinger Capital Partners Fund Investor Litig., No. 12 Civ. 1244(AJN), 2013 WL
5441754 (S.D.N.Y. Sept. 30, 2013), vacated in part on other grounds, 2013 WL 7121186 (Dec. 16,
2013).
144. In her order granting Harbinger’s motion to dismiss, Judge Alison Nathan acknowledged the
SEC’s complaint. Id. at 4–5.
145. See discussion supra section II.A.3.
146. Press Release, Sec. & Exch. Comm’n, JPMorgan Chase Agrees to Pay $200 Million and
Admits Wrongdoing to Settle SEC Charges (Sept. 19, 2013), available at http://www.sec.gov/News/
PressRelease/Detail/PressRelease/1370539819965.
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457
portfolio of credit derivatives, causing it to misstate its financial results in public
filings.147 The losses are popularly known as the “London Whale,” the nickname of the trader responsible for them.148 The Commission alleged violations
regarding current financial reports, accurate books and records, and reasonable
internal accounting controls.149 There are no private rights of action for these
offenses.150 The Commission imposed a $200 million penalty.151
JPMorgan provided a separate 7,700-word annex of admissions, acknowledging that “its conduct violated the federal securities laws.”152 It did not admit to a
violation of an antifraud statute or to knowing or reckless misconduct. The
limited scope of the defendant’s admissions are telling, because the company
was in the midst of litigating a 10b-5 private class action in the Southern
District of New York over this misconduct.153 The admissions, one commenter
remarked, “won’t be of much use to shareholders in the class action.”154 Even
the factual admissions, another observed, “constitute, at worst, negligence.”155
By avoiding an acknowledgement of scienter and facts sufficient to prove it,
JPMorgan ensured that its settlement with the SEC would not have significant
collateral estoppel effects in the private action.156 As of December 2014, the suit
was pending before Judge George Daniels.157
In an unrelated matter, the U.S. Commodity Futures Trading Commission
brought and settled charges with JPMorgan on October 16, 2013, and “appeared
to follow the SEC’s lead [by] requir[ing] admissions that [its] traders acted
recklessly.”158
147. JPMorgan Chase & Co., Exchange Act Release No. 70,458, 107 SEC Docket 4, at 2 (Sept. 19,
2013).
148. Patricia Hurtado, The London Whale, BLOOMBERG (Oct. 17, 2013), http://www.bloomberg.com/
quicktake/the-london-whale.
149. See JPMorgan Chase, 107 SEC Docket 4, at 4; see also Securities Exchange Act of 1934
§ 13(a), (b)(2)(A)–(B), 15 U.S.C. §§ 78m(a), (b)(2)(A)–(B) (2012).
150. See Fisher, supra note 72.
151. JPMorgan Chase, 107 SEC Docket 4, at 19.
152. Id. Annex A at 1, 8–15.
153. See Complaint, Smith v. JPMorgan Chase & Co., No. 12-3852 (S.D.N.Y. May 14, 2012).
154. Alison Frankel, Don’t Get Too Excited About JPMorgan’s Admissions to the SEC, REUTERS
(Sept. 19, 2013), http://blogs.reuters.com/alison-frankel/2013/09/19/dont-get-too-excited-aboutjpmorgans-admissions-to-the-sec.
155. Fisher, supra note 72.
156. See Dina ElBoghdady & Danielle Douglas, JPMorgan’s Admission: A Symbolic Victory for the
SEC, of Limited Use in Private Lawsuits, WASH. POST (Sept. 19, 2013), http://www.washingtonpost.com/
business/economy/jpmorgan-chase-to-pay-920-million-for-london-whale-trading-loss/2013/09/19/
0c9d7d52-2130-11e3-b73c-aab60bf735d0_story.html (“[T]he admission is a carefully crafted
acknowledgment that’s unlikely to be used against JPMorgan in private lawsuits or against its senior
managers—none of whom were named in the SEC order filed in administrative court. . . . The factual
admissions made by the bank relate to lax internal controls and the failure to ensure the accuracy of its
public disclosures, all violations of a regulatory provision that can be enforced only by the government.”).
157. See In re JPMorgan Chase & Co. Derivative Litig., No. 12 Civ. 03878(GBD), 2014 WL
1297824 (S.D.N.Y. Mar. 31, 2014).
158. Marc J. Fagel, Securities Enforcement: 2013 Year-End Securities Enforcement Update, INSIGHTS, Jan. 2014, at 1, 5; see Press Release, Commodities Futures Trading Comm’n, CFTC Files and
458
[Vol. 103:433
3. ConvergEx Group
On December 18, 2013, the SEC and the Justice Department simultaneously
announced charges and settlements against three brokerage subsidiaries of
ConvergEx Group.159 In its administrative order of settlement, the Commission
provided a summary of its own findings, to which the company did not admit,
and maintained that the company had “willfully” violated Rule 10b-5.160 Specifically, the Commission alleged that the defendants unnecessarily routed equity
orders to an offshore affiliate in order to charge undisclosed mark-ups or
mark-downs, leading many customers to “pay[] more than double the amount
that they thought they were paying to execute orders.”161 The Commission
alleged that “certain” customers were victims to the fraud but did not identify
them.162 It ordered the defendants to pay nearly $80 million in disgorgement,
plus interest, and a penalty of $20 million.163
The ConvergEx defendants admitted to 3,500 words of “facts,” admitted that
they “engaged in a fraudulent scheme by taking steps to intentionally or
recklessly conceal from customers the practice of taking” the undisclosed
trading profits, and admitted that their “conduct violated the federal securities
laws.”164 By acknowledging that they “t[ook] steps to intentionally or recklessly conceal” but not that they actually “intentionally or recklessly conceal[ed],” the defendants arguably did not admit to acting with scienter.165 They
also did not admit to violating Rule 10b-5, and they avoided identifying
culpable persons by acknowledging only that “certain members of their senior
management[] understood that customers likely were unaware of [the] practice
of taking” undisclosed trading profits.166
Nine days later, plaintiffs brought a 10b-5 class action against ConvergEx
Group, citing the SEC consent order as Exhibit 1.167 As of December 2014, the
case is pending.
Settles Charges Against JPMorgan Chase Bank, N.A., for Violating Prohibition on Manipulative
Conduct in Connection with “London Whale” Swaps Trades (Oct. 16, 2013), available at http://
www.cftc.gov/PressRoom/PressReleases/pr6737-13.
159. Press Release, Dep’t of Justice, Convergex Group Subsidiary and Two Employees Plead Guilty
to Securities and Wire Fraud Charges (Dec. 18, 2013), available at http://www.justice.gov/opa/pr/2013/
December/13-crm-1328.html; SEC, supra note 130. In the parallel DOJ proceeding, ConvergEx pled
guilty to wire fraud and conspiracy to commit securities fraud and wire fraud. See Dep’t of Justice,
supra.
160. G-Trade Servs. LLC., Exchange Act Release No. 71,128, 107 SEC Docket 17, at 2–3 (Dec. 18, 2013).
161. Id. at 2.
162. Id.
163. Id. at 15.
164. Id. at 1, 4–11.
165. Id. at 6, 9 (emphasis added).
166. Id. at 6 (emphasis added).
167. See Complaint, Fletcher v. ConvergEx Grp., LLC, No. 13-9150 (S.D.N.Y. Dec. 27, 2013).
2015]
459
4. Scottrade
On January 29, 2014, the SEC announced charges and a settlement with
brokerage firm Scottrade by administrative order.168 The defendant admitted to
600 words of jointly authored facts describing how the defendant inadvertently
failed to provide complete trading data to the Commission upon request.169 The
firm admitted to negligence and to three separate, willful violations of Section
17(a).170 First, Scottrade failed to furnish accurate copies of broker-dealer
records.171 Second, it failed to properly maintain, preserve, and produce “blue
sheet” trading data.172 Third, it failed to maintain an audit system for its
records.173 The Commission ordered the company to pay a $2.5 million penalty.174
Scottrade’s broad admissions of wrongdoing are easily explained: the fraudulent misrepresentations and omissions were committed against the SEC, not any
private person. Thus, a private action against the defendant would not be
possible.
5. Credit Suisse Group
On February 21, 2014, the SEC announced and settled charges by order with
the Swiss holding company Credit Suisse Group.175 The Commission provided
a summary of findings, to which the company did not admit.176 According to the
Commission, Credit Suisse provided cross-border brokerage and advisory services to U.S. clients, without registering with the SEC as a broker-dealer or
investment advisor as required.177 The Commission opaquely identified victims
as “certain U.S. clients” and culpable individuals as “certain . . . representatives.”178 The company allegedly realized approximately $82 million in pre-tax
income through these activities.179 The Commission maintained that the defendant violated registration provisions of the securities laws, ordered payment of
$82 million in disgorgement, plus interest, and imposed a $50 million penalty.180 The company admitted to 4,200 words of facts and acknowledged that it
violated “the federal securities laws.”181
168. Scottrade, Inc., Exchange Act Release No. 71,435, 103 SEC Docket 3 (Jan. 29, 2014).
169. See id. at 1–4.
170. See id. at 4. An admission of negligence is inferred from Scottrade’s acknowledgment that it
violated Section 17(a).
171. See id.
172. Id.
173. See id.
174. Id. at 7.
175. Credit Suisse Grp. AG, Exchange Act Release No. 71,5933, 108 SEC Docket 6 (Feb. 21, 2014).
176. See id. at 2–4.
177. See id. at 2.
178. Id.
179. Id.
180. Id. at 2–4, 11, 13–14.
181. Id. at 1, 4–11.
460
[Vol. 103:433
As of December 2014, a private lawsuit has not been filed. The availability of
a 10b-5 right of action cannot be determined, because it is not clear from
publicly available facts if the defendant committed a fraud on investors or
committed a fraud within the territorial reach of the federal securities laws.182
6. Lions Gate Entertainment
On March 13, 2014, the SEC announced charges against film and television
distributor and studio Lions Gate Entertainment Corp.183 In its cease-and-desist
order of settlement, the agency made 4,700 words of findings in which it
concluded the company failed to disclose material information regarding a
defensive recapitalization designed to thwart a hostile takeover by tender offer.184 Attempting to act quickly and to circumvent New York Stock Exchange
rules regarding prior shareholder approval, Lions Gate’s board engaged in a
series of extraordinary measures during a midnight meeting to dilute outstanding shares.185 The company then attributed its actions to a nonexistent “previously announced plan to reduce its total debt” and failed to disclose material,
relevant facts in its public filings.186 The agency determined that Lions Gate had
violated rules on tender offers and misleading financial reports and imposed a
$7.5 million penalty.187 Lions Gate made 4,600 words of admissions that were
identical to the agency’s own factual findings and “acknowledge[d] that its
conduct violated the federal securities laws.”188 Although the company did not
admit to violations of particular laws, its factual admissions were specific and
uncommonly illuminating.
Lions Gate’s common stock price dropped by more than 9% in the week after
the facts in the settlement came to light.189 On July 11, 2014, private plaintiffs
filed a class action against Lions Gate in the U.S. District Court for the Southern
District of New York, alleging violations of Rule 10b-5 and citing the company’s admissions in the complaint.190 As of December 2014, the case is pending.
182. See generally Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010) (discussing the
territorial scope of an action under Rule 10b-5).
183. Press Release, Sec. & Exch. Comm’n, SEC Charges Lions Gate with Disclosure Failures While
Preventing Hostile Takeover (Mar. 13, 2014), available at http://www.sec.gov/News/PressRelease/Detail/
PressRelease/1370541123111.
184. See Lions Gate Entm’t Corp., Exchange Act Release No. 71,717, 108 SEC Docket 9 (Mar. 13,
2014).
185. See id. at 2–7.
186. Id. at 8–10.
187. Id. at 11; see id. at 3 (“By engaging in the conduct described herein, Lions Gate violated
Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-11 thereunder and Exchange Act Section
14(d) and Rule 14d-9 thereunder.”); see also Securities Exchange Act of 1934 §§ 13(a), 14(d), 15
U.S.C. §§ 78m(a), 78n(d) (2012); Securities and Exchange Commission (SEC) Rules 12b-20, 13a-11,
14d-9, 17 C.F.R. §§ 240.12b-20, 13a-11, 14d-9 (2013).
188. Lions Gate, 108 SEC Docket 9 Annex A, at 13.
189. Complaint for Violations of the Fed. Sec. Laws, Laborers Pension Trust Fund v. Lions Gate
Entm’t Corp., 2014 WL 3381465, at *3 (S.D.N.Y. July 11, 2014) (No. 14 Civ. 5197).
190. Id. at *8.
2015]
461
7. Bank of America
On August 21, 2014, the agency settled charges by cease-and-desist order
against Bank of America Corp.191 In 3,100 words of factual findings to which
the bank did not admit, the Commission alleged that Bank of America failed to
disclose material uncertainties regarding its rising obligations during the financial crisis to repurchase mortgage loans and residential mortgage-backed securities. The agency found Bank of America to have misled investors in a registration
statement and two quarterly filings about potential effects on its future income
of $1.7 billion in contested claims.192 Bank of America admitted to 600 words
of facts and admitted that “its conduct violated the federal securities laws.”193
The Commission imposed a $20 million penalty as part of a larger, $16.65
billion settlement between Bank of America and the Department of Justice, “the
largest civil settlement with a single entity in American history.”194 As of
December 2014, there is no private class action.
8. Wells Fargo Advisors
On September 22, 2014, the SEC announced and settled charges against
broker-dealer Wells Fargo Advisors, LLC, by order of the Commission.195 In
the settlement, the agency provided a summary of findings to which the firm did
not admit, alleging that it failed to maintain adequate internal controls to prevent the misuse of material nonpublic information, causing the firm to overlook
red flags indicating insider trading by one of its representatives using misappropriated customer information.196 The agency also alleged that Wells Fargo
Advisors withheld evidence and produced an altered document during Enforcement’s investigation.197 The Commission fined the firm $5 million for violations
of internal control requirements and Section 17(a), among other provisions.198
Wells Fargo Advisors admitted to 3,500 words of detailed factual information
and that “its conduct violated the federal securities laws.”199 There is no basis
for a private right of action, on the facts alleged in this case.
191. Bank of America Corp., Exchange Act Release No. 72,888, 109 SEC Docket 12 (Aug. 21,
2014).
192. Id. at 3, 9; see SEC Rule 12b-20, 17 C.F.R. § 240.12b-20 (2013); Item 303 of Regulation S-K,
17 C.F.R. § 229.303 (2013).
193. Bank of America, 109 SEC Docket 12 Annex A, at 12.
194. Press Release, Dep’t of Justice, Bank of America to Pay $16.65 Billion in Historic Justice Department Settlement for Financial Fraud Leading Up to and During the Financial Crisis (Aug. 21, 2014),
available at http://www.justice.gov/opa/pr/bank-america-pay-1665-billion-historic-justice-departmentsettlement-financial-fraud-leading; see Bank of America, 109 SEC Docket 12 Annex A, at 11.
195. Press Release, Sec. & Exch. Comm’n, Wells Fargo Advisors Admits Failing to Maintain
Controls and Producing Altered Document, Agrees to Pay $5 Million Penalty (Sept. 22, 2014),
available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543012047.
196. See Wells Fargo Advisors, LLC, Exchange Act Release No. 73,175, 109 SEC Docket 17, at 2–3
(Sept. 22, 2014).
197. See id. at 3–4.
198. Id. at 4, 11, 14.
199. Id. at 1, 4–11.
462
[Vol. 103:433
B. OBSERVATIONS
The case studies above allow for several important observations. First, the
agency’s preferred method of finalizing settlements is the administrative order.
Of the first eight cases with admissions, seven were settled by order of the
Commission;200 the other was filed in federal court as an unsettled complaint a
year before the agency revised its admissions policy.201 This is not likely due to
collateral estoppel concerns;202 it may be connected with federal judges’ increased scrutiny of SEC settlements in recent years203 or simply the relative
ease of handling cases internally.
Second, for those defendants required to make admissions, the SEC appears
to be dropping its longstanding demand that they agree not to deny allegations
in public. This might be a trivial development, as a corporation is unlikely to
publicly deny misconduct that it also publicly admits.204 However, because
defendants are often admitting to a smaller body of legal and factual issues than
the SEC alleges, the corporation is theoretically free to publicly deny everything
in the gap.205 For example, the Commission specifically alleges that JPMorgan’s
losses grew to almost $6 billion,206 but JPMorgan does not cite this figure in its
statement of admitted facts.207 Thus, although the classic admissions regime is
called “no admit, no deny,” the new one may become “some admit, some deny.”
So long as a company can avoid admitting a particular issue of fact or law in its
settlement, it might explain away that issue in its statements to the public—with
the notable caveat that a denial of material fact, if unfounded, might form the
basis of an independent securities fraud violation.
Third, ambiguous admissions of law that the SEC is extracting from corporate defendants are generally inhibiting the use of collateral estoppel on legal
issues. For an overview of the eight settlements, consult Table 2 below.
Without inferring but-for causation of any poor private outcome, one should
observe that in seven of the eight settlements, the defendants did not specify any
provision of the securities laws that they violated. While their admissions
helped “determine[] finally” that misconduct occurred, companies usually did
not indicate what the particular frauds were or who, specifically, committed
them.208 Those admissions, therefore, were not particularly useful to subsequent
private plaintiffs for estopping litigation on legal issues. In the case of Scot200. See discussion supra section III.A.2–8.
201. See discussion supra section III.A.1.
202. See discussion supra section II.A.2.a.
203. See discussion supra section I.C.
204. See discussion supra section III.A.1.
205. Where a denial might give rise to a fraud violation of securities fraud, however, denial is
unlikely.
206. JPMorgan Chase & Co., Exchange Act Release No. 70,458, 107 SEC Docket 4, at 2 (Sept. 19,
2013).
207. See id. Annex A.
208. See 3 MOORE’S MANUAL, supra note 66, § 30.73[1][c][ii] (noting that a consent judgment may
be given preclusive effect “[i]f the parties to [the] consent decree express clearly the intention that the
2015]
463
Table 2: Quick Reference for the First Eight SEC Settlements Containing
Corporate Admissions
Available
SEC Right
of Action
Violation
Admitted
Available
Private
Right of
Action
Private Action
Status
Harbinger
10b-5
Reckless violations* 10b-5
Dismissed
JPMorgan
10b-5
Securities laws*
10b-5
10b-5 pending
ConvergEx
10b-5
Securities laws*
10b-5
10b-5 pending
Scottrade
17(a)
17(a)
None*
None, as of
December 2014
Credit Suisse Registration
Securities laws*
requirements*†
None*†
None, as of
December 2014
Lions Gate
10b-5
Securities laws*
10b-5
10b-5 pending
Bank of
America
10b-5
Securities laws*
10b-5
None, as of
December 2014
Wells Fargo 17(a)
Advisors
Securities laws*
None*
None, as of
December 2014
* denotes a significant reason why legal issue preclusion would be unlikely
† The existence of fraudulent misconduct cannot be determined based on facts in
public filings.
trade, the company admitted to violations of Section 17(a), knowing that
investors had no private right of action.
Fourth, the parties are not including explicit terms in their settlements to
unequivocally rule out the possibility of issue preclusion.209 Instead, they
appear to be impeding its use through creative, case-specific methods.
Finally, the push for corporate admissions may be obstructing the search for
public accountability in some cases. Where pressed to admit wrongdoing,
defendants refuse to admit all of the agency’s factual allegations,210 confess to
unidentified violations,211 or strip their factual admissions of proper nouns.212
The Commission, in turn, is accepting settlements by administrative order,
bypassing federal judges and the prospect of scrutiny in the courts.213
decree to be entered does not only terminate the litigation of claims, but also determines finally certain
issues”); see also discussion supra section II.A.2.b.
209. See discussion supra section II.A.2.d.
210. See discussions supra sections III.A.2–3, 5, 7–8.
211. See discussions supra sections III.A.1–3, 5–8.
212. See discussions supra sections III.A.3, 5.
213. Due to the Second Circuit’s recent ruling, it is possible that the agency will return to the
judiciary for consent decrees, but this has yet to be seen. See discussion supra section I.C.
464
[Vol. 103:433
CONCLUSION
In many ways, the SEC’s new practice of extracting admissions harks back to
the pre-1972 years, when defendants settled charges with the regulator but
needed not take their defeats seriously.214 Today, corporations are crafting
admissions of wrongdoing that sidestep full disclosure or accountability; and
the Commission, which desires confessions, is often willing to compromise.
To the extent that corporations are acknowledging past misconduct, their mea
culpas are valuable for the closure that they bring. But defendants are making
admissions on one significant condition—that they not be required to suffer the
biggest consequence of making them. In each of the eight cases examined here,
defendants have brokered deals in which they admit to some wrongdoing but
generally avoid the risk of legal issue preclusion by subsequent private plaintiffs.
214. See discussion supra section I.A.

Admit It! Corporate Admissions of Wrongdoing in SEC Settlements

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