Sitting in a federal prison for the rest of his life, Bernard Madoff neither admits nor denies that he committed civil securities fraud.
Yes, he pleaded guilty to criminal fraud and drew a 150- year sentence for his $20 billion bilking. But the U.S. Securities and Exchange Commission settled its civil fraud case against him without making him acknowledge a solitary lie.
So routinely do people and firms resolve SEC cases “without admitting or denying” wrongdoing, as the agency’s boilerplate phrase goes, that even the guiltiest of fraudsters who confess in criminal court to the most audacious of crimes never come clean with the SEC, which has its own, civil cases to resolve. They don’t have to admit anything for the agency to get off their backs, as long as they agree to disgorging allegedly ill-gotten gains and other penalties.
At least with Madoff and anyone else pleading or found guilty in criminal court, the public can be pretty sure they ripped off someone. But what about those who are never charged with crimes, who are accused only by the SEC in civil actions?
How are we to know whether an accused person or firm really lied to investors? Except for the rare defendant who denies wrongdoing and goes to trial, there’s no way to know.
Only about 20 lawsuits go all the way to trial out of more than 600 filed nationally a year, says SEC spokesman John Nester.
“Our main objective in any case is to obtain appropriate sanctions against wrongdoers,” says Nester.
Not demanding an admission while forbidding a denial is supposed to help accomplish that. Accused violators will give up a lot to avoid a trial where they could be found liable. And they’re not about to confess anything. An admission or verdict against them would be manna from heaven for plaintiffs’ lawyers representing investors or others who say they were cheated.
It’s the same policy the Justice Department and other agencies follow in civil cases. For that matter, how often do you see two private parties resolve a lawsuit where one of them admits misconduct? It’s rare.
You can say the SEC is different because its civil actions are sort of semi-criminal. At least one federal judge has had enough of the SEC practice of letting defendants settle with no confession.
“An agency of the United States is saying, ‘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,’” U.S. District Judge Jed Rakoff wrote this week.
Implied mea culpa
“The disservice to the public inherent in such a practice is palpable,” he wrote in a court order. He approved a settlement despite the boilerplate language it contains.
He signed it, he said, because guilty pleas in parallel criminal cases and the size of the civil penalty consented to by Vitesse Semiconductor Corp. mean the “company has effectively admitted the allegations.” The SEC accused it of cooking its books, back-dating stock options and lying in material public statements.
But not every SEC case has a parallel criminal case, and it’s not always clear from settlement terms whether the alleged villains did bad things.
Did International Business Machine Corp. employees really bribe Chinese and South Korean officials, as the SEC claims? The computer-services provider agreed this month to pay $10 million to resolve the matter, without admitting or denying anything.
Companies would have us believe that sometimes it’s simply cheaper to settle than fight. And if they don’t have to admit liability, then why not get it over with?
‘Stew of confusion’
Or maybe Company X really did what the SEC says. Of course it would rather leave that question unresolved than face trial and be found liable, anyway.
“The result is a stew of confusion and hypocrisy,” Rakoff complained. “The defendant is free to proclaim he never remotely admitted the terrible wrongs alleged,” as long as he doesn’t flat out deny them, the New York judge wrote.
Rakoff warned that he is “reserving for the future substantial questions” of whether he could keep signing off on agreements when the accused doesn’t say whether the allegations are true.
At least one SEC commissioner has had similar misgivings.
Luis Aguilar told an audience last month that he wants defendants to “take accountability for their violations and issue mea culpas to the public.”
He wants an end to company press releases that suggest the SEC over-reacted. Otherwise, he said, the commission may reconsider its routine acceptance of settlements in which the accused culprit neither admits nor denies misconduct.
Aguilar’s comments sound more like a threat aimed at those who try to squirm around the no-denial provision of their SEC settlements.
As for Rakoff, who has tangled with the SEC in the past, stay tuned to see whether he can force a redo of SEC practices by rejecting a settlement now and then.
He makes a point. The current policy looks silly in cases like Madoff’s, and inconclusive in the grayer ones.
But in the real world of litigation, it’s hard to see how demanding an admission as part of a settlement would do anything other than drive more accused violators to trial, at taxpayer expense, without producing tougher penalties for the wrongdoer.
Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.