On Friday morning, the 2nd Circuit Court of Appeals is going to
get an earful on the Securities and Exchange Commission's policy
of permitting defendants to settle SEC cases without admitting
to the allegations against them. A three-judge panel is
scheduled (snowstorm permitting) to hear oral arguments in the
joint appeal by Citigroup and the SEC of U.S. Senior District
Judge Jed Rakoff's rejection of their $285 million settlement.
Rakoff's controversial decision to squash the deal turned on the
SEC's now infamous "neither admit nor deny" policy, which the
judge found to be contrary to the public's interest in the
"cold, hard, solid facts" of the government's case. Since the
November 2011 ruling, the SEC has repeatedly justified its
policy as a necessary expedient, both to critics demanding
accountability from defendants and to a handful of federal judges who followed Rakoff's lead and questioned "neither admit
nor deny" settlements. To call Friday's appellate consideration
of the SEC's policy hotly anticipated is an understatement.
But according to a panel of securities lawyers speaking
Wednesday at a D&O symposium hosted by the Professional
Liability Underwriting Society, there's another SEC practice
that also has a major impact on the integrity of the markets:
the agency's refusal to share investigative materials with
securities class action lawyers until after private plaintiffs'
cases have survived defense dismissal motions. Samuel Rudman of
Robbins Geller Rudman & Dowd raised the point, and, as you might
expect, he complained about the SEC's practice of withholding
documents and testimony the agency obtains in investigations,
even in response to Freedom of Information Act requests by
plaintiffs' lawyers. The surprise came when panel moderator (and
defense lawyer) Boris Feldman of Wilson Sonsini Goodrich &
Rosati agreed with Rudman that turning over such information to
shareholder lawyers would help the SEC police the markets.
"If you really wanted to maximize deterrence, you should
share information with the plaintiffs bar," Feldman said. "That
would be terrible for me and my clients, but it changes
everything right away."
That's because of two factors. The SEC can obtain documents
and testimony from defendants quickly, but under the Private
Securities Litigation Reform Act class action lawyers have to
wait until their cases have survived dismissal motions. Class
actions, on the other hand, can be much more expensive for
defendants to resolve than SEC enforcement actions. Consider the
example of Bank of America's alleged misstatements to investors
about its merger with Merrill Lynch. BofA settled with the SEC
for $150 million in 2010, after Rakoff balked at the original
$35 million settlement; the bank had to cough up $2.43 billion
in 2012 to settle the securities class action stemming from the
So under the current system, Feldman explained, defendants
can delay big-money securities class action claims for years,
even if the SEC is concurrently investigating the supposed
wrongdoing. Defendants, he said, would have much more to fear if
private lawyers were armed with documents and testimony from the
government case - and that fear could deter wrongdoing.
I followed up Thursday with another member of the PLUS
panel, Max Berger of Bernstein Litowitz Berger & Grossman (who,
incidentally, negotiated that $2.43 billion BofA settlement for
shareholders). Berger said that, of course, it's not the SEC's
job to help shareholders, or their lawyers, win securities class
actions, and he wouldn't expect the agency ever to share its
work product. He also said that once class actions survive
dismissal and plaintiffs are permitted to conduct discovery,
shareholder lawyers can obtain material from the SEC (and other
government agencies) by serving document requests. But in the
crucial early stages of securities class actions, when
plaintiffs have to include detailed and specific allegations in
their complaints in order to fend off dismissal, the SEC offers
"When we really need it is at the pleading stage," Berger
said. "(But) the answer is always going to be, 'This is an
ongoing investigation and we can't share materials with you.'"
Like Rudman of Robbins Geller, Berger said that the SEC
routinely denies his firm's FOIA requests.
He told me he doesn't think there's any legal prohibition on
the SEC making investigatory information public, although a
policy of sharing information with the plaintiffs bar would
obviously complicate the SEC's interactions with defendants.
Keeping the facts private, after all, is the whole reason
defendants want to be able to reach "neither admit nor deny"
settlements with the agency.
SEC spokesman John Nester sent me an email response to my
questions about the agency's practices on information sharing.
He said, "There's no such policy, except that commission rules
generally prohibit disclosure of non-public investigative
materials to anyone during the course of an investigation or
litigation." Plaintiffs' lawyers have the same rights and access
as anyone else to information the SEC obtains, Nester said.
Moreover, he said, plaintiffs' lawyers already enjoy the benefit
of the SEC's work in enforcement actions.
"An SEC action represents the culmination of months or years
of painstaking investigation and testimony," Nester said in the
email. "Behind the detailed factual allegations spelled out in
an SEC complaint, there is a robust evidentiary record to
support our claims. As a result, our complaints are valuable
roadmaps for plaintiff counsel that clearly describe the conduct
that we believe violates the federal securities laws and the
evidence to support those claims."
One side note on Wednesday's discussion of the SEC policy of
refusing to share information with plaintiffs: Judge Rakoff was
also on the PLUS panel. Unfortunately for the audience, he
avoided opining on any other SEC policies.
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