As I have been discussing on this blog recently, SEC Commissioner Luis Aguilar recently threatened to reconsider the agency's policy of permitting defendants to settle cases without admitting or denying any misconduct. I also noted in this column that U.S. Judge Jed Rakoff suggested in his opinions last year in the SEC/Bank of America settlement that he viewed the "without admitting or denying" policy as no more than “a contrivance designed to provide the SEC with the facade of enforcement … [where] the SEC gets to claim that it is exposing wrongdoing on the part of Bank of America in a high-profile merger; the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.”

Although Judge Rakoff ultimately did, reluctantly, approve the Bank of America settlement, his distaste for the SEC's settlement policy seems to have only grown greater. On Monday of this week, Judge Rakoff again unloaded on a policy that he now labels "a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C."

Judge Rakoff's latest attack on the "without admitting or denying" policy came in his March 21, 2011 opinion approving a settlement between the SEC and Vitesse Corp. and two of its executives. In his opinion, he observed that

Under the SEC's policy, "the public will never know whether the S.E.C.'s charges are true, at least not in a way that they can take as established by these proceedings."

While such a policy might be defensible if only private parties were involved, SEC cases involve "an agency of the United States [] saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.”

The DOJ does not permit defendants, "except in the very most unusual circumstances, to enter into pleas of nolo contendere, by which a defendant accepts a guilty plea to a criminal charge without admitting or denying the allegations."

Notwithstanding their agreement not to make any public statement denying the SEC's allegations, SEC defendants are "have no difficulty getting the word out that they are still denying the allegations," as noted by Commissioner Aguilar.

Ultimately, Judge Rakoff approved the Vitesse settlement anyway. He found that the individual defendants had already admitted their guilt in parallel criminal proceedings, and Vitesse had "effectively admitted the allegations of the complaint" through its payment of a total of over $5 million between the SEC case and a private class action. As such, he wrote that he was approving the settlement but "reserving for the future substantial questions of whether the Court can approve other settlements that involve the practice of 'neither admitting nor denying.'”

So the next SEC settlement that is brought before Judge Rakoff could be quite interesting.

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