On January 6, 2012, the US Securities and Exchange Commission (SEC or Commission) announced a modification to its long-standing policy of allowing corporations that settle civil actions with the SEC to enter into agreements in which they neither admit nor deny any wrongdoing. The change would apply to cases with parallel criminal proceedings where the corporation admits to, or is actually convicted of, a criminal offense relating to the same conduct. In those cases, corporations will no longer be allowed to include language in settlement agreements that could be construed as being inconsistent with the findings of the parallel proceeding. The change also will apply where a company enters into a deferred prosecution or non-prosecution agreement with a law enforcement agency.

In all other cases, the Commission’s general policy of allowing corporations to settle civil actions or administrative proceedings without admitting or denying wrongdoing remains applicable. The SEC generally does not require anyone to admit wrongdoing in settlements, whether or not there is a parallel criminal investigation or proceeding.

Even though the number of instances where a corporation admits guilt in a criminal case but neither admits or denies civil liability is relatively small, the Commission felt that it was necessary to change the policy in order to remedy this apparent inconsistency. The practice of seeking the “neither admit nor deny” language is still sound, in order to protect a corporation from further legal trouble, such as shareholder suits. However, once a company has admitted certain facts or specific violations of law in a criminal case, such a shield is no longer available. Therefore, the shift in policy can be seen as nothing more than a correction of an odd glitch in SEC settlement practice.

Despite much speculation that the rejection of a proposed SEC settlement with Citigroup by Judge Rakoff of the US District Court for the Southern District of New York would lead to broad reform of the SEC’s policy with respect to “neither admit nor deny” language in settlements, the SEC stated that this modification was unrelated. For now, cases like Citigroup—where the company was charged with fraud allegedly causing $700 million in losses, but settled with the SEC for $285 million without admitting any wrongdoing or stipulating to any facts—remain a viable option for corporations. Criticism of the practice, even where there is no parallel criminal proceeding, also remains.

Because of the benefit to both the SEC, which cannot litigate every case it investigates through final judgment, and to corporations, which wish to be spared the public embarrassment and financial and other consequences of admitting wrongdoing, it appears that the practice of including “neither admit nor deny” language in settlement agreements will continue for the foreseeable future. Therefore, corporations must be aware of the pitfalls of the practice.

First, while such language generally cannot be used against them in subsequent litigation, settlements often spur civil actions. The information contained in the agreements become public knowledge and can quickly be used as a roadmap for shareholder and class action lawsuits.

Second, it is a requirement of such settlements that the settling party not deny the alleged wrongful conduct in any future circumstance, including if called to testify as a witness in any subsequent civil action: if they do the SEC can reverse the settlement and reopen the consent decree. Therefore, corporations facing such circumstances should carefully negotiate language of settlement agreements that protect the ability of a company and its officers to tell the truth and characterize the settlement language as they see fit in any subsequent case.

For more information about the topics raised in this Legal Update, please contact the author, Richard Rosenfeld.

To learn more about Mayer Brown’s Securities Litigation & Enforcement practice, please contact Joseph De Simone, Richard Rosenfeld, or Jay Tharp.