Neither Admit Nor Deny

Excerpt from an article in The New York Times
Saturday, February 25, 2012

‘Neither Admit Nor Deny’ Settlements Draw Judges’ Scrutiny 

By EDWARD WYATT

WASHINGTON — The entrenched practice of allowing companies and individuals to settle federal regulatory charges without admitting that they actually did anything wrong is coming under growing scrutiny by the courts.

Two federal judges have questioned such settlements proposed by the Securities and Exchange Commission and this week a third judge held up a settlement offered by the Federal Trade Commission.

Judge Renee Marie Bumb of United States District Court in Camden, N.J., blocked a proposed settlement on Wednesday between the Federal Trade Commission and a marketing company based in New Jersey on charges that the company and its chief executive made false and unsubstantiated claims that the use of açaí berry-based products, which they promoted, would result in rapid and substantial weight loss.

Judge Bumb ordered both the commission and the company to justify why she should approve the proposed $11.5 million settlement when the lack of an admission by the company and the executive of any wrongdoing left her with no facts with which to judge whether the negotiated deal was fair, adequate and in the public interest.

In doing so, she cited a much-discussed case involving the S.E.C. and Citigroup. Last November, Judge Jed S. Rakoff of Federal District Court in New York rejected a proposed $285 million settlement of securities fraud charges for the same reason: without an admission of guilt or agreed-upon facts there was no basis for an approval.

And on Friday, an S.E.C. commissioner, Luis A. Aguilar, told a group of securities lawyers that a recent attempt to tighten the agency’s policy of allowing a company to settle a fraud case while neither admitting nor denying any wrongdoing “applies in so few situations, it needs to be revised to be more useful and effective.”

While another S.E.C. case in Wisconsin, where a federal district judge in December challenged an S.E.C. settlement, was subsequently approved, the cases demonstrate that Judge Rakoff’s challenge of the “neither admit nor deny” settlement is reverberating beyond Wall Street and New York.

That is not what securities law experts expected last November, when Judge Rakoff issued the ruling.

At the time, the consensus was that the decision was unlikely to affect cases involving other regulatory agencies or in other jurisdictions.

Because the proposed settlements included a permanent injunction against further wrongdoing by the defendants, they are subject to approval from a federal judge. But Judge Rakoff argued that the judiciary should not be considered a rubber stamp to approve executive-branch enforcement cases.

Lawyers both inside and outside the S.E.C. argued that the “neither admit nor deny” settlements were perhaps the only way to get companies to settle fraud cases, because to admit wrongdoing would open them to civil damages. (Emphasis added by me.)

An appeal of Judge Rakoff’s decision by the S.E.C. is pending at the Second Circuit Court of Appeals in New York.