Has the Cost of Compliance Just Gone Up? SEC To Seek More Guilt Admissions

    By Bruce Romney | Small Business

    The Securities and Exchange Commission (SEC) has recently announced that it will require some Has the Cost of Compliance Just Gone Up? SEC To Seek More Guilt Admissions image 274987 l srgb s gl 199x300Has the Cost of Compliance Just Gone Up? SEC To Seek More Guilt Admissionsdefendants to choose between admitting to wrongdoing as a condition of settling securities fraud charges (thereby opening themselves up to potential civil litigation), or fighting the charges in court. Will the possibility of going to court or making an admission of guilt in out-of-court settlements require an adjustment to how organizations look at the cost of compliance?

    The SEC is a civil enforcement agency whose settlement practices, up until now, had allowed a “no admit/no deny” settlement, closing the door to further civil litigation unless there was a criminal admission or judgment in a parallel criminal case.

    The new guidance suggests this would be most relevant in securities fraud related cases where the plaintiff(s) were able to substantiate the egregious nature of fraud and significant harm.

    What Are Some Examples of Securities Fraud?

    You don’t have to look far to find cases of high-level corporate fraud or misconduct. The one typically thought of is Enron back in the early 2000s, but many others less publicized examples—but equally damaging to the individual investor—can be found. Such cases include insider trading, accounting fraud, and the misleading of investors through complex investment and trading vehicles.

    So Who Will This Affect?

    We can gain insight from Jacob S. Frenkel, a former federal prosecutor and senior SEC enforcement attorney, and now a partner at a well-known law firm in Maryland. He said “the policy will probably affect mostly smaller companies and individuals viewed as ‘uncontrollable fraudsters’ ”.

    Big corporations that face major economic consequences from litigation “always will be afforded the opportunity to settle without admitting or denying the allegations,” Frenkel added. “For certain defendants, it will almost be an invitation to go to trial because the most important carrot in the settlement is the ability to settle without admitting or denying the allegations. So everything is going to turn on interpreting where that red zone lies.”

    How Will This New Guidance Affect the Cost of Compliance?

    From an early assessment, it seems reasonable to conclude that those organizations with smaller war chests and less appetite to pursue an in-court battle may have to consider improving their controls and compliance environment to avoid potential admissions and further civil litigation.

    What do you think?

    To learn more about the SEC’s announcement, I recommend you read this Bloomberg Businessweek article.

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