SEC Settlement Negotiations: What to Expect.

Settlement negotiations with the SEC’s Division of Enforcement can occur before or after the agency files formal charges. If they occur before charges, the division’s staff attorneys may present you with a negotiated settlement offer that outlines the terms you must agree to in order to avoid litigation. If they occur after charges, you may still be able to negotiate a similar settlement, but you will likely have to make some concessions. A typical SEC settlement includes:

• Civil monetary penalties
• Disgorgement
• Interest
• Investor compensation restitution
• Bars or suspensions of registration
• Professional bars
• Undertakings
• Other undertakings

You will need to negotiate the scope of each of these sanctions.

Additionally, it is important to understand that a negotiated settlement offer from SEC staff does not constitute a commitment by the Commission to settle on those terms. The SEC Enforcement Division’s staff cannot bind the agency, as a negotiated settlement must be approved by the SEC Commissioners. Commissioners consider any parallel criminal or private claims, and an SEC settlement must not interfere with these other proceedings.

An SEC settlement does not automatically resolve other civil or criminal claims filed by the U.S. Attorney’s Office, the Department of Justice, other federal agencies, or private plaintiffs. The risks involved in SEC enforcement and criminal litigation are different, and strategic decision-making is necessary to avoid being charged criminally.

The SEC Enforcement Division investigates possible violations of federal securities laws. Inquiries can be triggered by:

• Tips
• Complaints
• Examinations
• Public filings
• Trading surveillance
• Referrals

Preliminary inquiries generally rely on voluntary document and information requests. However, if the inquiry raises additional issues or appears sufficiently serious, the division may seek a formal investigation order from the SEC Commissioners. With a formal order, staff can issue administrative subpoenas to witnesses and third parties.

When does an SEC settlement become final and binding?

The following are examples of how the SEC can enter into a negotiated settlement agreement:

Rule 201.240 of the SEC’s Rules of Practice states, “In administrative proceedings, administrative settlement offers shall be in writing, signed by the offeror, and shall be clear as to the terms of the settlement.” Under this Rule, “the Commission may accept, reject, or defer ruling on a settlement offer.” Settlement offers accepted by the Commission can go into effect “immediately upon approval by the Commission, or at a date and time specified in the offer.” Rule 201.240 states that if the Commission rejects an offer of settlement, the person making the offer is notified and “the offer of settlement shall be deemed withdrawn.” An acceptance occurs only when “the Commission issues findings and an order in conformity with the offer.”

While most SEC enforcement actions are administrative, the Commission has also filed numerous civil lawsuits against defendants in federal district courts. To reach a settlement with the SEC in these federal cases, the SEC must obtain an authorized consent judgment from the U.S. District Court. These consent judgments are signed by the federal district judge and become legally binding.

Administrative proceedings that end with negotiated settlements end when the SEC issues public orders that identify the charged parties and the terms of the settlements. These settlements are either approved by Commission action or through Commission order. By submitting a Rule 201.240 settlement offer, a party waives all hearings, all post-hearing procedures, and judicial review by any court, so a settled administrative proceeding cannot afterward be appealed to the Commission or to a court.

In federal cases, SEC enforcement staff can also offer what are referred to as Rule 408 settlement negotiations. These negotiations are conducted in confidence and, when authorized, a consent judgment will be filed with the court. In all cases involving Rule 408 settlement negotiations, the SEC’s policy remains that any parties who are not settling must litigate or join in the settlement.

The 17 C.F.R. § 202.5(e) provision, which includes “that the defendant neither admit nor deny the allegations in the complaint, but shall not publicly deny the charges contained therein,” is a standard provision in SEC consents to enter judgments without admission of liability or the specific findings of wrongdoing.

While most SEC consenting agreements include a “no admit, no deny” provision, they also typically include a no-denial provision that prohibits consenting defendants from publicly denying any of the allegations in the SEC complaint.

SEC v. Steadman, 967 F.2d 636 (D.C. Cir. 1992), “the no-denial provision ensures that the public is not misled,” and “the judgment is not to be a conclusion of litigation, but rather a final judgment on the merits to which the defendant agrees to be bound.”

When considering negotiating an SEC settlement, parties should also consider the impact that a settlement will have on parallel criminal and private litigation. As discussed above, an SEC settlement agreement does not automatically resolve liability or establish the standard of negligence for parallel claims involving similar charges. This is true even when the settlement judgment includes any findings of liability and fault.

What Terms Can I Negotiate in an SEC Settlement?

• Mitigating Conduct, Self-reporting, cooperation, remediation, and investor repayment can all serve to favorably influence the imposition of sanctions during the settlement process. Nevertheless, the SEC may ultimately deem these mitigating efforts to be insufficient. This means that showing mitigation is not enough to ensure a favorable outcome.
• Officer, Director, Professional, and Securities-Industry Restrictions, While SEC staff and commissioners have the discretion to impose industry-wide sanctions, they cannot require defendants to agree to consent decrees that are unenforceable. For example, bars or suspensions from serving as a director or officer of a public company can be imposed during litigation or as part of a negotiated settlement.
• No Admission of Liability, In many cases, the SEC allows respondents to settle without admitting or denying the allegations in the charging documents. However, this is not a guaranteed outcome. The SEC may reserve the right to assert that certain respondents must admit to factual allegations and other wrongdoing in order to reach an acceptable settlement.
• Inability to Pay, Respondents who cannot pay the amounts they owe to the SEC can seek “inability to pay” treatment. As a condition of this treatment, individuals who cannot afford to settle their cases must submit a Form D-A (Disclosure of Assets and Financial Information) to the SEC.
• Payment Plans, Parties who cannot pay the full amount of their SEC settlement in one lump sum may also be eligible to receive payment plan accommodations. If a party defaults under an SEC payment plan, then 28 U.S.C. § 1961 interest may accrue, and the SEC can pursue collection measures.
• SEC Recovery, When the SEC sues a party on behalf of defrauded investors, it will claim the party’s return of the stolen funds to be for the benefit of the investors. To resolve an SEC settlement, the respondent generally pays the settlement to the SEC, which it then distributes to legitimate claimants upon their agreement to release the respondent. However, this process is typically slow and can take years to complete. However, you can negotiate for the SEC to make payments directly to the affected investors or to a Fair Fund.

As noted above, negotiated settlements that involving neither admitting nor denying liability will not always include a “no admit, no deny” provision. With no no-admit-no-deny provision, such settlements may allow the SEC to pursue the accused individual or entity in additional civil or criminal court proceedings.

What Should I Avoid Saying During SEC Settlement Negotiations?

Individuals must be careful what they say in their Wells submissions, as statements made during these submissions can be used by the SEC in related enforcement proceedings. This is especially true if the individual is the primary target of these proceedings. Statements made under the Fifth Amendment are protected, and this protection extends to compelled self-incrimination. However, individuals do not have the same protection for voluntary admissions and acknowledgments. This can lead to criminal charges under 18 U.S.C. § 1001 if an individual knowingly communicates false information to federal investigators. This law provides for up to five years of federal imprisonment for making false statements and omitting the truth.

When facing an SEC investigation, subjects should avoid coordinating their accounts with colleagues, clients, and potential witnesses. While it is important for all involved parties to have a consistent defense strategy, coordinating accounts can be misconstrued. This can lead to concerns, such as allegations of witness tampering.

Individuals may accidentally make uncounseled admissions that have negative consequences for their SEC, criminal, regulatory, and private proceedings. While these admissions may not be admissible as evidence in some cases, they can still be used to make determinations of guilt or negligence in other contexts.

Insulting or accusing SEC staff will not help to avoid facing the allegations in an SEC enforcement proceeding. Such responses do not address the alleged violations, and they can alienate the individuals whom you need to work with in order to seek a favorable resolution.

The SEC’s Form 1662 also explains that information shared with the SEC may be shared with other government agencies and self-regulatory organizations. The SEC can provide information to these entities if it is deemed appropriate for an ongoing investigation.

While respondents and the SEC can agree to keep information confidential, such an agreement does not automatically preserve privilege. For example, a judgment may include a confidentiality provision; but if third parties or private plaintiffs file suit against the consenting parties, the information shared during settlement negotiations may still be subject to discovery.

An individual who is a party to a negotiated settlement with the SEC will have a clear record of any civil monetary penalties, officer or director bars, or other sanctions they received. However, the public may also learn about these sanctions and may use this information to challenge the individual’s ability to perform in any professional role.

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

How Can an SEC Settlement Affect Other Cases and Coverage?

The DOJ has the authority to pursue criminal charges and criminal consequences against individuals that are not available in civil SEC enforcement proceedings. Even if an individual reaches a settlement with the SEC, they must continue to defend against any criminal claims pursued by the DOJ, as settlements do not establish immunities.

Generally, the documents of the settlement become public through the SEC’s administrative proceedings or the federal court proceedings. These settlement documents may be read by third parties, which means, in any future criminal cases, they are likely to include any admissions or concessions. This means that the DOJ and other government agencies are likely to be aware of the admissions and concessions and will be able to use the facts of the settlement during future litigation proceedings.

Neither the SEC nor SEC staff can grant immunity from federal criminal prosecution. While you can seek such immunity by filing a plea deal with the DOJ, the SEC and its staff have no authority to grant such immunity from a SEC settlement.

Under the Securities Exchange Act, any broker, dealer, and registered investment advisor who is subject to an SEC disciplinary order may be deemed a “statutorily disqualified” person. This means that the person may not be able to work in the securities industry without FINRA’s approval or a FINRA waiver. This means that, when attempting to reach a negotiated settlement, it is important to ensure that this does not result in loss of licensure or in a FINRA license or registration of status disqualification, unless this outcome is warranted.

In certain cases, FINRA can and does enter into settlements with broker-dealers in administrative proceedings. Settlements between FINRA and the SEC are not generally in conflict with each other. However, if an individual is subject to a SEC settlement, FINRA may seek disciplinary action for violations of the SEC order and securities laws. Any outcome of a negotiated settlement must be acceptable to FINRA, or the SEC must be the sole enforcement authority.

Under Regulation D’s Rule 506(d), issuers relying on a safe harbor to exempt transactions from registration may be denied this exemption due to a “bad-actor disqualification.” Generally, this means that issuers that rely on Regulation D will not be eligible to exempt their transaction if the issuer is subject to the SEC’s order which bars or suspends them from the industry.

In most cases, the SEC’s consent judgments and settlement agreements include no indemnification provisions, prohibiting defendants from seeking insurance reimbursement for the settlements they will be forced to pay to the SEC, and from seeking indemnification from any corporate insured. Additionally, under the terms of many D&O policies, an insurer’s consent will be necessary before the insured accepts a settlement offer.

How Long Do SEC Investigations and Negotiations Take?

A Wells notice is a letter from the SEC’s Division of Enforcement that notifies the recipient that the Division’s staff attorney has completed an investigation and is recommending that the SEC pursue charges against the recipient.

A Wells notice does not initiate the SEC’s formal investigation. In fact, receiving a Wells notice means that the staff has finished its investigation and is prepared to move toward filing charges. If you have not yet received a Wells notice, the SEC may be in its pre- Wells stage of an investigation and its SEC staff may still be in the investigation stage. While the SEC cannot formally charge individuals that have not been investigated, the timing of a Wells notice can be unpredictable because the SEC has not set any uniform statutory completion deadline for its investigations.

Receiving a Wells notice is not equivalent to receiving a formal charge. A Wells notice is the staff’s preliminary communication that the staff is recommending that the Commission pursue charges. The Commission can reject a staff attorney’s enforcement recommendation, and it can modify and issue different charges than those the staff attorney requested.

The SEC’s investigations can continue even after it issues a Wells notice to the prospective defendant. The division’s staff may rely on any newly received information in order to expand the investigations, or conduct additional investigations into other related charges against other parties. In such cases, the SEC Enforcement division will need to issue a second Wells notice to all the affected parties before the SEC Commission determines whether to file formal charges.

The deadline to file a Wells response must appear in the recipient’s Wells notice. This period is often short and may not afford the accused sufficient time to fully investigate the subject of the investigation. The SEC Enforcement division may grant an extension to allow an individual to formulate an appropriate response; however, requests for extensions must be made promptly and the response must be filed by the final deadline.

If you have not received a Wells notice and you are willing to settle with the SEC, this does not mean that the SEC is willing to settle. If you are willing to settle with the SEC, this does not mean that you have limited options for defense and appeals during a SEC enforcement action.

How Should I Compare SEC Defense Lawyers and Fees?

An entity whose employees or owners are subject to an SEC investigation may need to retain separate counsel. While it may be possible for a single law firm to represent the interests of all parties, this may require conflict-of-interest waivers, which are required under Rule 1.7 of the American Bar Association’s Model Rules of Professional Conduct.

Unlike representation in class actions and other litigation, federal securities laws do not set any percentage cap on defense counsel’s fees in SEC enforcement proceedings. The applicable fee structure will typically depend on the terms of the engagement and any other professional-conduct rule that applies to the attorney.

Many SEC defense lawyers charge on a retainer and hourly fee basis, rather than on a recovery percentage. However, the terms of a negotiated settlement with the SEC can determine whether respondents will need to pay interest on amounts they owe as part of their settlements.

In a negotiated settlement, attorney fees are separate from any sanctions. For example, respondents who agree to pay civil monetary penalties and disgorgement are still responsible for paying their lawyers’ fees.

When selecting the best SEC defense lawyer, it is important to keep in mind that there is no objective legal standard that allows anyone to identify a single “most-feared” law firm. While this does not make selecting the right lawyer difficult, it does make a well-informed decision very important. This is especially true if your business or career could be at stake.

3. How Long Does an SEC Investigation Take?

The SEC does not publish any data about its average investigation timelines or the length of its proceedings. This means that no one can tell you the average length of an SEC investigation.

4. How Long Do Negotiations and Settlements Take?

The SEC does not publish data about how long it takes to settle cases as well. This makes it challenging to know how long negotiations will last, or how long the settlement process will take. The SEC does not limit how long the negotiating process is, nor has it published any statistics regarding a target for closing cases. This means that the timing of any settlement will be subject to several factors.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.