As part of an attempt to start requiring admissions of guilt in some legal settlements with banks, the Securities and Exchange Commission (SEC) has drafted “a hit list” of likely candidates for the stricter enforcement effort. The Wall Street Journal reports that the list focuses on pending cases and exempts settlements that are already near completion. The SEC hopes to score its first guilt admission before Labor Day.
The agency has come under fire for relying on settlements that allow financial companies and employees to resolve an investigation without acknowledging — or denying — misconduct. As Sen. Elizabeth Warren (D-MA) and others have noted, favoring such settlements over going to trial doesn’t give companies that profit from violating the rules very much incentive to change their behavior.
The shift in tactics from the agency has largely played out via carefully vague public statements. Mary Jo White, the new head of the SEC, responded in early June to Sen. Elizabeth Warren’s inquiry about the prevalence of “neither admit nor deny” settlements by announcing an “active review” of the no-fault policy while also defending its use. Two of White’s deputies later announced to SEC staff that “most cases will continue to be resolved” without admissions of guilt, but according to various reports no specific criteria exist for determining which cases will receive which treatment.
The lack of specifics may be preventing White’s announcement from altering industry behavior. As Thomson Reuters’ Nick Paraskeva writes, “The change is unlikely to have a practical impact on firms until evidence is available of which violations the SEC considers serious enough to merit its use.” It will be easiest to get guilty admissions in cases involving bankrupt firms, applying the stricter enforcement only where it’s easiest would be a signal to the industry that the change is merely cosmetic.
Some of the largest settlements the SEC has won since the financial crisis have been delayed over a federal judge’s concerns that the no-fault provisions allow the industry to treat fines “as a cost of doing business.” That would seem to give the agency good reason to maximize the deterrent impact when picking its first targets for admissions of guilt, but SEC contests that idea. A spokesman told ThinkProgress that there are multiple factors that will guide the agency’s choices. “Each case stands on its own,” the spokesman said. “Obviously there will be a deterrent effect, but you don’t choose which cases would be first because of how much deterrent effect the individual case would have.” The internal letter asking Enforcement Division staff to review ongoing cases reflects that sentiment, sketching out a few general qualities for cases that merit an admission of guilt approach without specifically pointing to likely deterrent impacts.
The financial industry has faced few consequences in the years since it caused the economy to collapse. Financial fraud prosecutions hit a 20-year low in 2011, and even the largest settlements over foreclosure fraud have been plagued by loopholes that allowed large banks to game the rules and goose their profits.