Companies are much more willing to part with millions of dollars than to admit that they have done wrong and violated the law. Settlements with enforcement agencies, the Securities and Exchange Commission chief among them, almost never require companies to admit wrongdoing -- almost.
For the past two years, the SEC has been pursuing such admissions more fervently. Under a new-ish policy, the Commission requires admissions of wrongdoing in "egregious" cases.
Who Is at Risk of Being Forced to Admit Wrongdoing?
There's a reason companies avoid any admission of wrongdoing. Those admissions come with "complex collateral consequences," according to Christine Edwards, of Inside Counsel. Those consequences can be particularly grave if a company's business license or government contracts impose fiduciary obligations, according to Edwards. There's also the risk that a company will be estopped from later denying wrongdoing in subsequent criminal prosecutions and private actions.
Certain factors may influence how likely a company is to be forced to admit wrongdoing. Large public companies are at risk, as our large trading firms, according to Inside Counsel. If there's a large number of injured investors, the odds of the SEC taking a harsh stance increase. Of course, the higher profile the company and the more publicized the violation, the more likely the SEC will be to "make an example" out of the company in settlement negotiations.
The first admission the SEC obtained under the new rule was from hedge-fund advisor Phillip Falcone. Falcone "borrowed" over $100 million from the fund without informing investors. Falcone was followed quickly by JPMorgan Chase, which admitted wrongdoing after its London branch lost $6 billion. That admission helped the SEC counter critics who claim it gives violators little more than a slap on the wrist.
What Counts as Egregious?
The SEC adopted its newer, stricter settlement policy two years ago. Under the policy, the Commission will seek admissions of wrongdoing when settling "egregious" cases. What counts as egregious? Don't expect any firm guidance from the Commission. SEC Chairwoman Mary Jo White says that "to some degree, it can turn on how much harm has been done to investors, how egregious is the fraud."
That's not exactly a bright-line rule, but Chairwoman White did give a few more hints as to what counts. Along with harm to the market and investors, the SEC is likely to focus on where investors would benefit from an admission in making future investment decisions. The SEC will also pursue admissions of wrongdoing where facts are unambiguous, even if the policy itself is not.