Academic journal article Journal of Corporation Law

Neither Admit nor Deny: Recent Changes to the Securities and Exchange Commission's Longstanding Settlement Policy

Academic journal article Journal of Corporation Law

Neither Admit nor Deny: Recent Changes to the Securities and Exchange Commission's Longstanding Settlement Policy

Article excerpt


On June 4, 2014, the Second Circuit Court of Appeals issued a long-awaited ruling in SEC v. Citigroup Global Markets, Inc. (Citigroup III).1 The decision finally ended a contentious line of cases2 which pitted the tenacious Federal District Court Judge Jed S. Rakoff against the venerated Securities and Exchange Commission (SEC or Commission). Even though the SEC ostensibly prevailed in Citigroup III, in many ways Judge Rakoff had already won.3 On June 17, 2013, prior to the Second Circuit's decision and largely in response to Judge Rakoff 's criticisms, the SEC announced a change to its long-standing "neither admit nor deny" (NAND) settlement policy.4 The change expanded the categories and circumstances of cases in which the SEC would demand admissions from defendants.5 The change is the most significant since the SEC officially adopted NAND in 1972.6

The first signs of Judge Rakoff's displeasure with NAND settlements emerged in SEC v. Bank of America (Bank of America I).7 In August of 2009, the SEC filed a complaint alleging that Bank of America made false statements to garner investor support for a $50 billion merger with Merrill Lynch.8 The SEC claimed that Bank of America issued a proxy statement reporting that Bank of America would not issue performance bonuses for Merrill Lynch executives prior to the closing of the merger without Bank of America approval.9 In fact, Bank of America had already approved the payment of $5.8 billion in performance bonuses to Merrill Lynch executives. 10 The SEC's proposed NAND consent decree11 called for Bank of America to pay a $33 million fine and refrain "from making future false statements in proxy [statements]."12

Judge Rakoff found the SEC's proposed NAND settlement unacceptable for at least three reasons. First, the victims-Bank of America's shareholders who had been misled to the tune of $5.8 billion-would pay a $33 million fine as a penalty for their own victimization.13 He questioned why the SEC did not seek a penalty against the lawyers who drafted the proxy statements instead.14

Second, Judge Rakoff criticized one of the key elements of NAND settlements-the SEC's request for injunctive relief.15 Bank of America submitted statements to the court claiming that the allegedly false proxy statement was "totally in accordance with the law."16 Given Bank of America's position that the proxy statements were lawful, Judge Rakoff called injunctive relief "pointless."17 If the defendant believed the statements were lawful, and if there were no finding of fact to the contrary, it made no sense to enjoin Bank of America from making similar lawful statements, which it would be free to make again in the future.18

Judge Rakoff concluded by pointing to what he called a "cynical relationship" between the SEC and Bank of America.19 A relationship where the parties were willing to shift the burden of the defendant's alleged wrongdoing to the victim-shareholders, and where the SEC would claim a hollow victory (a NAND settlement) at the "expense . . . of the truth."20 He then denied the consent decree, set a trial date, and told the parties to prepare to litigate the case.21

Later, in SEC v. Bank of America (Bank of America II),22 Judge Rakoff begrudgingly approved a revised consent decree which addressed some of the concerns he expressed in Bank of America I,23 but he called the final result "half-baked justice at best."24 Judge Rakoff stated that if he were considering the case de novo, he "would reject the settlement as inadequate and misguided."25 Although Judge Rakoff did not directly criticize NAND settlements in Bank of America I or II, these cases set the tone for a clash that would culminate in the SEC's changes to its NAND regime.

This Note explores the history and legacy of NAND settlements, the likely motives for the SEC's recent changes to its NAND policy, the potential short- and long-term effects of the changes, and recommends further policy measures that the SEC may adopt to alleviate public and judicial scrutiny of NAND. …

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