Financial regulators on Thursday defended the practice of settling federal charges brought against financial firms without requiring them to admit they did anything wrong.
Speaking to lawmakers during a hearing held by the House Committee on Financial Services, Securities and Exchange Commission director of enforcement Robert Khuzami and other regulators told lawmakers that so-called “no admit, no deny” settlements can be more efficient, less expensive and, in many cases, just as effective as bringing cases to trial.
Settlements have received heightened scrutiny since judge Jed Rakoff of the U.S. District Court for the Southern District of New York in Manhattan rejected a $285 million settlement between the SEC and Citigroup Capital Markets last November.
In his opinion, Rakoff said he could not determine if the settlement was in the public’s interest and questioned what the SEC would gain from the settlement, other than a “quick headline.”
The SEC and Citigroup are appealing.
Thus far, all of the civil muni bond bid-rigging settlements the SEC and other agencies have reached with firms during the past two years have allowed those firms to neither admit nor deny the allegations.
They include Banc of America Securities, now Bank of America Merrill Lynch, which agreed in December 2010 to pay $137 million to settle charges; UBS Financial Services Inc., which said in May 2011 that it would pay $160 million; JPMorgan Chase & Co., which agreed in July 2011 to pay $228 million; Wachovia, now Wells Fargo & Co., which agreed in November 2011 to pay $148 million; and GE Funding Capital Market Services Inc., which said in December 2011 that it would pay $70 million.
Some committee members expressed concern that settlements let firms avoid admitting guilt, and do not discourage offenders from repeating violations.
“While I know the SEC sometimes has a strong interest to settle cases quickly in order to get money into the hands of defrauded investors, the commission also has a broader responsible to enforce the rule of law,” said Rep. Maxine Waters, D-Calif. “When no wrongdoing is admitted, it encourages repeat offenses.”
“I don’t see anyone going to jail,” said Rep. Steve Pearce, R-N.M. “With all the criminal activity we see on Wall Street, I see a real lack of accountability and prosecution.”
But Khuzami and regulators from the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System said settlements are crucial to their work.
Khuzami said the SEC recommends settlements when it believes terms of an agreement would be comparable to the outcome of a trial.
He noted that many settlements prohibit individuals from continuing to work in the industry, and cautioned that more trials would divert resources away from investigating new cases.
Khuzami said the commission litigates roughly one-third of its enforcement cases. Officials from the Federal Reserve, FDIC and OCC said their agencies settle the vast majority of enforcement cases.
Bringing a case to trial can cost the SEC over $1 million, and the outcome is uncertain, Khuzami said. While reaching a settlement can take one to three years, trials can take up to four years, or longer with appeals.
Regulators said more litigation would make federal enforcement efforts less effective and result in a financial system that is less safe and less sound. Some lawmakers agreed.
“A policy that ... requires the government to engage in lengthy and expensive trials in every instance would not serve the best interests of taxpayers or investors,” said committee chairman Spencer Bachus, R-Ala. “It makes more sense, in my view, to leave the judgement of whether to try a case or attempt to settle largely to the agencies’ discretion.”
The Securities Industry and Financial Markets Association will file a friend-of-the-court brief Monday expressing support for the proposed Citigroup settlement, said Kevin Carroll, SIFMA managing director and associate general counsel, in a statement.
Carroll said many agencies use settlements for “valid policy reasons.” They can result in substantial penalties, deter future violations, promote self-reporting and cooperation, and publicize firms’ conduct, he said.
