Written By: Phil Feigin
For the “uninitiated,” one of the odder aspects of securities law enforcement in the U.S., federal, state and SRO, is the consent injunctive prohibition culminating an enforcement action. Whether in the form of a court order, an administrative consent order, or an AWC (“Acceptance, Waiver and Consent”) from FINRA, among the sanctions levied against the person charged is language under which he is prohibited in the future from violating the securities law, regulations or rules that the average reasonable law school graduate would swear could not be violated in the first place. Is there some sort of regulatory “one bite” rule they didn’t teach you in law school?
Even more arcane is the fact that the stipulations entered on which the consent orders are based all but universally contain the proviso that, in agreeing to the entry of the order, the defendant/respondent neither admits nor denies that any of the allegations set forth in the matter by the regulators is true. Again, to the “novice” perusing such documents for the first time, considering that the stipulation and consent order were entered following an intensive, two year investigation including eighteen depositions, and production and review of enough documents to fill the Grand Canyon, resolving the matter without anyone admitting anything might seem somewhat—oh, I’m reaching for the word—tepid?
I was just as puzzled as most when I first encountered the prohibition and neither admit nor deny language back in 1979, my first year as a regulator. As it was explained to me back then, the reason for the prohibition language was to put the defendant/respondent on clear notice as to the law. Were the subject of the order to be found to violate it in the future, it would be helpful in seeking a contempt order, and assist in establishing “willfulness” for a criminal prosecution. Such an order was also a means of educating the general public that might read it as to the securities law and the way in which the agencies interpreted it in the context of specific conduct. So, no, there’s not really a “one bite” rule in securities law, even though it may sound like it.
The “neither admit nor deny” language is allowed for a number of reasons. First and foremost, such stipulations and consent orders are issued by regulators in administrative or civil forums regarding violations of statutory provisions that, in all but a few circumstances, also constitute crimes if found to be “willful.” Given that “willfulness” has been defined by one influential authority as nothing more than a “legislative hint to the administrator for discretion” as to which matters should be referred to prosecutors for criminal action, this barrier is not much of a hurdle to clear. The feeling was that a regulator could and should not make a party admit violations in the administrative or civil context that would constitute confessing to committing a crime in the criminal context.
Secondly, many of those very same administrative and civil violations give rise to private civil liability. If a party was made to admit violating the law in resolving an enforcement case, it could be viewed as confessing judgment for wronged investors. Regulators generally shy away from affecting the rights and liabilities of private parties. If for no other reason, they can be very bad at it. It is not their foremost mission to serve as a collection agency or to resolve who gets what of the money recovered. Those jobs are for private counsel, courts and receivers.
Further, were parties made to admit violations, they would either never settle the enforcement case, or the regulators would be put in the position of pleading the case down to some violation without criminal or private civil implications. Electing to resolve a major fraud case with the defendant’s admission to “record-keeping violations” and a $15 million fine would serve no interest at all.
Requiring admissions would likely grind the process down to a halt. Just as with plea bargains in criminal prosecution, there simply are not enough courts, judges and trial lawyers to bring every case to trial. There aren’t enough resources to bring even a lot more of them to trial. NASAA and other investor advocates are calling for an end to mandatory FINRA arbitration for brokerage clients. They would reverse the Supreme Court’s decision in Shearson v. McMahon that the Federal Arbitration Act preempts federal securities law voiding waiver of private rights. Can anyone really doubt that Shearson was rendered with at least some view toward the crisis of resources all those investor lawsuits would mean were they all brought to federal court?
In my view, securities regulators already have enough to do rather than fight the battles of private civil litigants and criminal prosecutors. Perhaps requiring admissions from defendants would provide some sense of moral expiation for those who advocate it, but at what cost? Will the requirement make the regulators “tougher” somehow? “We really showed them!” I suspect not. There is more than just “well, that’s the way we’ve always done it” to “neither admit nor deny.” It has been and is a way to finish Case 1 expeditiously and get on to Case 2, bringing as much suspected violative conduct to the public’s attention as soon as possible.
It is a slippery slope. If admissions are required in enforcement cases, can demands for criminal prosecution of every violation be far behind? And then how about sentences for everyone found guilty? Then we’ll really show ‘em!
Anyone who has served as a regulator negotiating an enforcement case settlement knows how defendants fight tooth and nail against agreeing to a stipulated consent order. The damage is done. They will have to report it and disclose it. They will have to try to explain it away to customers, banks and potential business partners for years to come, given the Internet. No one who reads the order takes into account that the defendants neither admitted nor denied the allegations are true. Down the road, the allegations will be treated as hard and fast facts by anyone except a court in a later proceeding, and even then, the allegations can be damning.
Retrieving damages rightly is and ought to be the domain of private civil counsel. A significant policy problem arises when private suits are precluded by legislative constraints. But that’s a subject for another day. Prohibitive injunctive orders and “neither admit nor deny” stipulations are the results of a lot of policy determinations and judgment calls. They weren’t just plucked out of thin air. They ought to be left alone.