What Is an SEC Consent Decree??

Q: How is an SEC Consent Decree Different from a Commission-Approved Administrative Settlement?

An SEC consent decree is a negotiated civil judgment entered by a federal court; a Commission-approved administrative settlement is an agency order issued in an administrative proceeding, which may have been initiated by a Commission “Order Instituting Proceedings” (OIP), and not a federal-court judgment. Even if the SEC approves a settlement in an administrative proceeding instituted by the Commission (a proceeding typically preceded by a “Wells Notice”), the resulting “order” is an administrative order issued by the Commission and entered in the Commission’s own files, not in the federal court’s docket. On the other hand, if the SEC settles a case it initiated by filing its own civil complaint in federal district court, the district court must enter the proposed consent judgment as part of the litigation process. While the Commission is able toapprove administrative settlements, it lacks the authority to grant civil settlements by itself when the proceeding is initiated in federal district court.

Q: Is the SEC Able to File Criminal Charges ?

No. The SEC lacks authority to file criminal charges. Any criminal charges in connection with an SEC investigation must be filed by the U.S. Department of Justice, ordinarily the U.S. Attorney’s Office for the relevant federal district, or the Fraud Section of the DOJ’s Criminal Division.

Q: Is FINRA the SEC or an SEC Agency?

FINRA is not the SEC, nor is it an SEC agency, even though it works closely with the SEC. It is a private self-regulatory organization under SEC oversight.

Q: Do the Enforcement Attorneys Who Handle an SEC Investigation Represent the Commission, Represent the Person Whose Conduct Is Under Investigation, or Represent the Private Investors Whose Money Is Allegedly Mismanaged ?

None of the above. SEC enforcement attorneys represent the Commission. They do not represent the person whose conduct is under investigation, and they do not represent any particular group of private investors.

Q: What Is Your Role?

We are private defense counsel. We owe our loyalty and confidentiality duties to you (or your business or other client).

Q: Is FINRA Part of the SEC?

No. FINRA is a private self-regulatory organization that operates under SEC oversight. While FINRA is mandated to conduct broker-dealer regulatory proceedings, it is not an SEC agency.

Who must approve an SEC enforcement settlement?

How Does the Federal Court Process Contrast with the Administrative Process in SEC Enforcement?

Q: How Does the Federal Court Process Contrast with the Administrative Process in SEC Enforcement?

The SEC is the primary federal agency responsible for civil enforcement of the federal securities laws. It does so in two forums: civil district court lawsuits and administrative proceedings. A federal district court judge presides over the SEC’s civil enforcement lawsuits. Also, though some are tried by an administrative law judge (ALJ), many of these matters are litigated through the Commission itself.

An SEC enforcement settlement cannot be binding on the Commission without Commission approval. Even if the SEC’s enforcement staff (i.e., the trial attorneys who investigate your case) agree to a settlement, it remains subject to Commission approval. That means that if you refuse to sign the settlement paperwork, the SEC’s enforcement staff cannot force you to accept the settlement. That said, if you agree to sign, your agreement will only bind you if the SEC Commissioners agree to sign.

If a Commission-initiated enforcement action is settled out-of-court, then after Commission approval, a district court must independently determine whether it will enter the proposed judgment. If the settlement resolves a matter the SEC initiated as an administrative proceeding, no district court is involved; the Commission itself approves the settlement and issues an administrative order making findings and imposing the agreed-upon sanctions. However, if the settlement resulted from litigation initiated in federal district court, the judge will enter a decision regarding the settlement after reviewing the terms and conditions. Once the judge enters his or her decision, if he or she accepts the proposed consent judgment, then the consent judgment will be entered, and the federal-court case will be over.

Q: What Are the Different Forums in the SEC’s Enforcement Process ?

The SEC’s administrative proceedings and district-court actions are distinct from one another. The administrative process is not the “first step” in an SEC enforcement action. It is only the first step when the SEC initiates an administrative proceeding for civil sanctions rather than initiating civil enforcement litigation. The SEC’s enforcement process could begin either by the initiation of an administrative proceeding for civil sanctions or with the filing of a lawsuit in federal district court. That’s why the SEC’s enforcement actions may be initiated either in administrative proceedings or through litigation in federal district court. While the SEC may do both, it is not required to do so.

Q: When Does a Proposed Consent Judgment Become Effective?

Once it is entered on the civil docket under Federal Rule of Civil Procedure 58, it becomes effective.

Q: How is an SEC Consent Decree Different from a Commission-Approved Administrative Settlement?

While the Commission is able to approve administrative settlements, it lacks the authority to grant civil settlements by itself when the proceeding is initiated in federal district court.

Q: What Happens Before the SEC Proposes a Consent Decree?

If you are named in a “Wells Notice,” then this is before you are formally named in an SEC enforcement action. During the Wells process, you are able to request information about the staff’s alleged findings, the specific laws, regulations, or rules the staff believes you violated (or that your firm violated), and the proposed remedy. In the Wells process, you (through your SEC defense lawyer) may also submit written arguments to the Commission; and you may be able to request a conference with the Commission and its enforcement staff as well.

Q: What Does an SEC Defense Lawyer Do?

An SEC defense lawyer’s job is to be the primary point of contact for the Commission’s attorneys. He or she handles document requests, subpoenas, interviews, and your testimony. The SEC defense lawyer also prepares your Wells submission (if applicable), deals with the SEC’s enforcement staff for you, and negotiates potential resolutions to your enforcement action on your behalf. If the SEC decides to take the enforcement action to trial, your SEC defense lawyer can handle all of your trial defense.

Q: How Long Takes Before the SEC Proposes a Consent Decree?

There is no set date on which an SEC investigation should be complete. However, the length of the SEC’s investigation depends on several factors. Some factors include the volume of documents to be reviewed, the number of witnesses to be interviewed, the number of witnesses to be identified, the number of witnesses to be subpoenaed, whether the federal-court or the Commission has jurisdiction, the number of parallel proceedings involved, the complexity of the case, and whether the investigation is at the Commission’s review stage.

Q: What Does a Wells Notice Mean?

A “Wells Notice” means that the SEC’s enforcement staff believes it has sufficient evidence to recommend that the Commission take an enforcement action against you. This is a formal notification that the staff has reached a preliminary conclusion of wrongdoing, but it is not guaranteed that the Commission will find that your conduct justifies civil or administrative charges.

Q: Do You Get an In-Person Conference with the Commission’s Enforcement Staff if You Receive a Wells Notice?

When you receive a Wells Notice from the SEC, you generally do not have an automatic right to have a conference with the Commission or its enforcement staff. However, requesting such a meeting with a Wells Notice response can be worthwhile in some cases, and SEC enforcement staff sometimes may grant the conference.

Q: When Should You Hire an SEC Defense Lawyer?

Hiring an SEC defense lawyer is important from the moment you become aware of an SEC enforcement investigation and must be completed before you speak with anyone about the investigation. This is because any information you share may be used against you if the SEC opens a civil enforcement action or the Justice Department files criminal charges in federal district court.

Q: When does the SEC-authorized District Attorney’s Office’s (DAO) investigate the SEC’s civil enforcement action?

When the SEC opens a civil enforcement action involving conduct that may also be criminal, the SEC may continue its civil investigation, while criminal authorities decide whether to investigate or prosecute. Depending on when the District Attorney’s Office begins its investigation, this may happen before or after the SEC opens its civil enforcement action. If the District Attorney’s Office begins its investigation before the SEC opens its civil enforcement action, that’s because the case has criminal elements that warrant an early investigation. If the U.S. Attorney’s Office begins its investigation after the SEC opens its civil enforcement action, that is because prosecutors identified potential criminal conduct while the civil case was already underway.

Todd Spodek and the attorneys at Spodek Law Group handle federal cases of this kind from New York, Brooklyn, Queens and Los Angeles.

Q: What Obligations and Consequences Come with an SEC Consent Decree?

The SEC can impose various civil remedies, and it can seek various forms of injunctive relief in federal civil litigation. Civil remedies can include:

• Disgorgement
• Monetary penalties
• Prejudgment interest
• A bar or suspension to serve as an officer or director of a publicly traded company
• A bar or suspension to act as a broker, dealer, investment adviser, transfer agent, or similar
• A cease-and-desist order

Injunctive relief can include:

• A request for a permanent injunction to prevent future violations
• A request for an injunction to either remove or cease particular activities
• Other equitable relief that is appropriate or necessary for the benefit of investors

Q: Is It the Case That Defendants Who Consent to Sanctions Must Admit Liability for the Allegations Against Them?

No. While 17 C.F.R. § 202.5(e) of the Code of Federal Regulations (CFR) bars settling defendants in administrative proceedings from denying allegations when consenting to sanctions, however, the SEC does not require admission of liability. In 2013, the SEC’s policy changed and the Commission now requires admissions in selected cases where admissions are deemed appropriate due to the Commission’s determination that the facts of the case are clear enough that an admission is warranted. This is most often the case where there are criminal charges involved.

Q: What Obligations Are Required in an SEC Consent Decree?

An SEC consent decree can require a party to undertake several obligations. These obligations can include:

• Implementation of a plan for compliance
• Engagement of an independent compliance consultant
• Conducting an internal audit
• Filing periodic reports about the status of the settlement

The amount of the monetary penalties that the SEC seeks in an SEC consent decree may be reduced depending on the amount and type of fines and penalties that have already been collected by the SEC or that may be collected in other enforcement actions and from other defendants.

Q: What Are the Different Financial Obligations Under an SEC Consent Decree?

The financial obligations under a consent judgment will vary, but they typically include:

• The deadline for the payment of penalties
• The deadline for the payment of disgorgement
• The deadline for the payment of prejudgment interest
• Whether interest is applied to payments made after the deadline

Q: Are Other Remedies Sought When the SEC Consent Decree Also Includes an Injunction?

An SEC consent decree may include an injunction when the SEC also seeks to stop a defendant’s conduct or require a defendant to do something in order to prevent or stop a future violation of the federal securities laws. Certain injunctions can trigger a “bad-actor” disqualification under Rule 506(d) of the Securities Act.

Q: When Does a “No-Admit” Settlement Constitute an Admission in Other Litigation?

A no-admit settlement typically does not constitute an admission of liability. For example, if the SEC enters a no-admit settlement in an enforcement action, then the settlement will usually not be an admission of liability in private litigation. It remains to be seen if this is a law of the land when it comes to settlements, but a recent case involving a no-admit settlement in private litigation suggests this no-admit settlement will not constitute a judicial admission of liability for securities fraud.

Q: Will Insurance Policies Pay for an SEC Enforcement Settlement?

Depending on the language of the insurance policy, it is possible for it to be covered. However, the insurance company may still have an opportunity to oppose paying. Insurance companies often contend that the settlement was the result of the failure to report or to maintain proper internal controls. If the insurance company denies the request to cover the settlement, the policyholder may be entitled to appeal this denial and potentially the insurer could be required to pay the settlement, but the insurer will likely fight to deny the coverage request.

Q: Can a Judge Reject, Enforce, or Change the Terms of a Consent Decree?

For any case involving the U.S. Securities and Exchange Commission (SEC), the proposed consent judgment must meet the criteria of the Citigroup ruling: the consent judgment must be fair, reasonable, and approved in the public interest. If the judgment includes a proposed injunction, then the proposed injunction must not disserve the public interest.

While the standards vary by federal circuit (i.e., the court’s geographic location) and the form of relief the SEC seeks, these considerations have been used to explain court judgments denying or rejecting SEC settlements. That said, while judges are able to reject consent decrees, they are not required to reject them. If the proposed consent judgment is found to meet the criteria of fairness, reasonableness, and public interest (or if it doesn’t disserve the public interest), then the court will enter the proposed consent judgment as the final judgment of the court.

Q: Can a Federal Court Enforce a Consent Decree?

A federal court has the authority to enforce a consent decree if the consent decree retains district-court jurisdiction. If the consent decree includes a term requiring an SEC enforcement action to be brought back to the federal district court for future enforcement, then that is an additional provision that increases the likelihood of a party being able to file a motion to enforce the terms of the consent decree with the district court.

Q: What Could Be the Consequences of Violating a Consent Decree?

Violations of a consent decree can lead to civil contempt sanctions. In a civil enforcement action under federal law, a federal judge who determines that the SEC has enough evidence of a violation of the terms of a consent decree may grant a penalty. If the SEC does not take action, then a defendant may be able to seek to have the consent decree vacated, based on any applicable state or federal rule (such as Federal Rule of Civil Procedure 60(b)(5)), if applicable.

Q: Can You Appeal a Consent Decree?

Parties who enter into a consent judgment generally do not have the right to appeal the agreed terms. In addition, an SEC consent decree generally will not contain provisions allowing the parties to appeal unless there is a procedural issue in the federal district court litigation. That said, you can object to the consent decree in the federal district court if you are dissatisfied with the terms and conditions of the consent decree, and seek to have the federal district judge reject the consent judgment in order to be able to negotiate a better deal for you.

Q: Can You Withdraw from a Consent Decree?

Once you signed onto a consent judgment, you cannot simply withdraw from it. However, a federal court can modify or dissolve a permanent injunction under Federal Rule of Civil Procedure 60(b)(5) when “the judgment is no longer equitable.” This rule gives federal judges a discretion to modify or dissolve permanent injunctions. If you want to withdraw from a consent decree, this involves filing a petition to the district court that will review your request and make a decision to either let you withdraw or force you to continue complying.

Q: Does an Injunction In a Consent Decree End After You Paid Your SEC Civil Enforcement Penalty?

No. After you pay your SEC civil enforcement penalty, you still must comply with an injunction. An injunction is an order from a federal court that remains effective unless a federal judge modifies or dissolves it. If you do not comply with a federal court’s injunction, then it can be considered a violation of the terms of the consent decree, and the SEC can seek to have the federal district judge punish you for civil contempt.

Q: What Else Can an SEC Enforcement Action Impose Other Than an SEC Consent Decree and the Civil Enforcement Penalty?

In addition to injunctive relief and civil enforcement penalties, the SEC is able to request from the federal court a temporary restraining order, asset freezing order, asset sequestration, pre judgment attachment, or other temporary remedies. If the SEC believes it has enough evidence to show that your assets may be dissipated or transferred without knowledge of the U.S. Attorney’s Office, the SEC can initiate emergency litigation with the district court and the court may order temporary relief until the merits of your civil enforcement action is addressed.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.