There is still a great deal of anger, frustration and confusion among investors and savers as to why there has been so few high-profile prosecutions and convictions since the start of the global financial crisis. Underlying these uneasy feelings is a concern that financial regulators have been too lenient when it comes to holding the largest investment banks to account.
That may be about to change. Or maybe not.
In the United States, the newly appointed chair of the Securities and Exchange Commission (SEC), Mary Jo White, recently made clear her desire to include more admissions of guilt when settling cases with alleged wrong-doers. This would be in line with established practice in the US Attorney’s Office where she previously worked, and where guilty pleas are much more common as a quid pro quo for settlement.
Unsurprisingly, observers have been hotly debating both what this means in practice and whether this is actually a good approach to take.
Allowing defendants to accept a punishment while “neither admitting nor denying guilt” is a time-tested approach that the SEC has followed for some time. However, there is a growing recognition that in order for the SEC to be seen as doing its job with the appropriate degree of assertiveness, getting defendants to go on the record and admit to their own culpability should be a priority.
One particular judge, Jed Rakoff of the Federal District Court, went so far as to state in 2011 that the practice of settling without an admission of guilt was “hallowed by time but not by reason”. Stressing the practical concerns he faced, Rakoff queried how he could validate the fairness of an SEC settlement agreement if he did not know whether or not something wrong had actually occurred.
The interesting rub in these circumstances is that this question arises specifically in voluntary settlement discussions between the SEC and the accused. Where the SEC feels that its chances of success at trial are strong enough, they will litigate in court. But where the SEC doesn’t feel that its chances are beyond dispute, they will instead decide that a negotiated settlement procedure is a better way forward.
The benefits of settlement are significant. In addition to saving scarce resources within the SEC, settling can provide for damages to be awarded to the victims of this misconduct quicker and more simply than would be the case in prolonged litigation.
Perhaps most importantly for the accused, though, is the knowledge that an admission of guilt will be a clarion call for would-be plaintiffs to launch civil litigation that could lead to devastating class action awards and, ultimately, bankruptcy. In that light, a guilty plea is not simply an abstract statement of moral culpability.
People want accountability, though, especially when it comes to amorphous financial institutions whose structure and operation are difficult to understand. In part, the negative feelings towards Wall Street result from the concern that not enough of the individuals and institutions whose behavior led to the global financial crisis were adequately punished. Perhaps too many were allowed to walk away with no more than a “slap on the wrist”.
However, White was clear that even with the new policy to push for more admissions of guilt, most SEC settlements with alleged wrong-doers will still be agreed under the old “no admit, no deny” standard.
Pragmatism is a key driver here. The SEC’s record at trial is not perfect, nor could it be expected to be. Case are regularly lost, as defendants are able to prove that one or more elements of the case have not been fully proven.
Cynics may claim that this change in policy is more a publicity ploy, adopted as a way for the SEC to be seen as “getting tough” on financial crime. The proof will ultimately only be found if the SEC actually succeeds in obtaining more settlement agreements - which are, of course, voluntary and the choice of each defendant - that include guilt admissions.
Like much in the law, this will be driven principally by the relative strength and weaknesses of the two cases. The burden remains on the SEC to convince wayward banks and stock brokers and fund managers that a conviction at trial would be a foregone conclusion.
That is a very, very tall order, and not one that will prevail in every case.