Negotiating SEC Settlements: Key Factors for Defense Lawyers

Negotiating SEC Settlements: Key Factors for Defense Lawyers

Dealing with an SEC investigation can be stressful and intimidating for any company or individual. However, skilled defense lawyers can help their clients navigate the process and negotiate favorable settlements. This article outlines key factors for defense lawyers to consider when negotiating resolutions with the SEC.

Understand the SEC’s Motivations

The SEC’s primary motivation in any enforcement action is to protect investors and maintain market integrity. However, the SEC also wants to use its resources efficiently and avoid lengthy litigation when possible. Knowing this can help defense lawyers frame settlement proposals that serve both parties’ interests.

For example, highlighting how a settlement will benefit investors or implement improved internal controls may resonate with SEC attorneys. Additionally, proposing reasonable penalties and disgorgement amounts that avoid prolonged legal proceedings can also be appealing.

Evaluate the Strengths and Weaknesses of the Case

Conducting a thorough investigation into the facts and assessing the strengths and weaknesses of the SEC’s case is critical. This involves reviewing documents, interviewing witnesses, analyzing applicable laws and rules, and evaluating the SEC’s legal theories and evidence.

While the SEC may present damaging facts initially, skilled defense lawyers can often uncover important mitigating evidence through their own investigation. If significant weaknesses in the SEC’s case exist, defense counsel can use these to argue for a better settlement.

Consider Potential Collateral Consequences

Beyond direct sanctions like fines and disgorgement, SEC settlements can trigger additional collateral consequences. These include:

• Statutory disqualifications from certain exemptions or safe harbors
• “Bad actor” disqualifications from private offerings
• Reputational damage
• Shareholder litigation
• Issues with customers, counterparties, and creditors

Evaluating these potential ripple effects allows defense lawyers to fully appreciate their client’s exposure and negotiate provisions to limit collateral damage. For example, obtaining waivers of automatic statutory disqualifications where appropriate can be extremely valuable.

Assess the Client’s Risk Tolerance

While avoiding litigation costs is a major driver for settlements, defense lawyers must also gauge their client’s appetite for risk. Some companies and individuals are inclined to fight allegations vigorously, while others prefer settling quickly.

Clients focused on avoiding reputational damage or uncertainty may favor early resolution, even if litigation risks appear manageable. On the other hand, clients staunchly believing in their innocence may want to litigate. Clear communication about pros, cons, and alternatives is essential.

Leverage Experience and Relationships

Seasoned defense lawyers adept at negotiating SEC settlements can provide invaluable perspective. Their past dealings with specific SEC attorneys and knowledge of typical settlement ranges for similar cases can inform discussions.

Additionally, many large law firms have attorneys who previously worked at the SEC. Their inside knowledge of the agency’s thinking can help shape effective arguments and proposals during negotiations.

Propose Creative Settlement Terms

Typical SEC settlements involve monetary payments, undertakings, and sanctions. However, experienced defense counsel can often craft creative, customized settlement terms that benefit both parties.

Examples include enhanced internal compliance programs, improved training and education for employees, cooperation commitments to assist other SEC matters, and unique reporting or monitoring arrangements. Proposing these types of extra measures shows the client’s commitment to reform.

Emphasize Remediation and Cooperation

Settlement proposals should highlight the respondent’s remediation efforts and cooperation with SEC staff. Demonstrating prompt corrective actions (like firing wrongdoers, improving internal controls, or retracting/correcting disclosures) can help reduce sanctions.

Likewise, underscoring the client’s assistance during the investigation, such as through document production, interviews, and sharing internal reports, can also favorably influence settlement terms.

Consider Using Mediators or SEC Advisory Committees

If settlement talks stall, defense lawyers can suggest bringing in mediators or SEC advisory committees. Mediators can facilitate constructive dialogue and bridge gaps between the parties’ positions. Advisory committees provide recommendations to SEC staff on proposed settlements.

Getting a neutral third-party perspective can sometimes yield creative compromises and break logjams. However, mediation does entail additional time and costs that should be weighed.

Don’t Reflexively Settle

Despite the allure of avoiding litigation, defense counsel should not reflexively recommend settling in every SEC matter. Sometimes, the risks of an adverse outcome in litigation may be low enough to justify fighting allegations.

For example, if the SEC’s case relies on questionable legal theories, weak evidence, or mitigating facts exist, litigation may be a viable option. Defense lawyers have a duty to provide their unbiased assessment, even if it means recommending against settlement.

Maximize Use of Wells Submissions

The Wells process provides respondents an opportunity to submit a written statement contesting allegations and legal theories before enforcement actions are recommended. Wells submissions allow defense counsel to preview deficiencies in the SEC’s reasoning and evidence.

Thorough, well-reasoned Wells submissions can sometimes dissuade SEC staff from pursuing charges altogether. At a minimum, they lay the groundwork for favorable settlement negotiations by front-running the SEC’s arguments.

Don’t Make Early Settlement Offers

Defense lawyers should generally refrain from making concrete settlement offers in early-stage discussions with SEC staff. Making lowball offers prematurely signals weakness and rarely gains traction.

Instead, counsel should use initial meetings to probe the SEC’s expectations and priorities first. This allows subsequent settlement proposals to be better calibrated once more is known about likely settlement ranges.

Use Multiple Forms of Communication

Finally, defense lawyers should use multiple forms of communication during settlement negotiations. While in-person meetings and phone calls can be effective, email and written correspondence can be equally important.

• Email allows creating a written record and trail of settlement offers and counterproposals. It also provides time for both sides to carefully evaluate positions.
• Letters facilitate laying out arguments and terms in a detailed, nuanced way not always possible verbally. They also memorialize important points.
• In-person meetings and calls enable reading body language and vocal tones to better understand motivations and flexibility.
• Joint, real-time drafting of settlement documents can accelerate progress through collaboration.

Leveraging these different channels tailored to various negotiation phases and objectives can improve communication and outcomes. However, defense lawyers must ensure consistency across platforms to avoid mixed messages.

Consider Admitting Lesser Charges

In some cases, admitting to lesser statutory violations can expedite settlements if fighting higher charges seems unwise. This allows closure on more limited violations rather than prolonging the battle.

For example, a company may admit to inadequate books and records or internal controls issues as part of a settlement, without admitting more serious fraud claims. Or an individual may admit to negligent conduct without knowingly violating securities laws.

However, defense counsel must weigh the collateral impacts of any admissions carefully. And admissions should only cover conduct the evidence clearly establishes, in keeping with ethics rules on truthful representations.

Seek Upfront Closure with Individuals

During corporate enforcement actions, SEC staff frequently demand sanctions against or bars of individual executives as part of settlements. However, obtaining upfront closures for officers, directors, or employees can limit their liability.

Settling individually with key personnel before finalizing corporate settlements can reduce uncertainty. It also contains damage to specific people rather than prolonging their case exposure.

That said, corporate interests and individual interests do not always align. Separate counsel may be advisable to avoid conflicts of interest when seeking individual closures.

Insist on Confidentiality

SEC settlements often become public through litigation releases or administrative proceedings. However, defense counsel can try negotiating confidentiality provisions, especially for individuals.

While the SEC strongly prefers transparency, it will sometimes agree to secrecy in limited circumstances. For example, anonymity may be possible if an individual did not profit from wrongdoing and agrees to cooperate.

That said, secrecy reduces deterrence value, so the SEC will likely insist on disclosure absent unusual circumstances. And courts can reject confidential settlements if deemed contrary to public policy.