Passing thought #5: The power of one

Never underestimate the power that can be wielded by one person who is in the right position at the right time.

The SEC has had a notorious practice of shielding corporations with which it reaches some settlement from further exposure to civil suits by allowing the company to "neither admit or deny" any actual wrongdoing - even in cases where the same corporation has been convicted of criminal violations for the same behavior.

This past November, Judge Jed Rakoff of US Court for the Southern District of New York, just wasn't going to go for that. He refused to accept a proposed settlement in a case involving Citibank, calling it "neither fair, nor reasonable, nor adequate, nor in the public interest."

More to the point here, he also said that the practice of allowing the "neither admit nor deny" business

deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.

Rakoff is having what several people are calling a ripple effect. In December, for example, a New York state Appellate court cited (in a footnote) Rakoff's criticism of SEC boilerplate in an earlier case as it dismissed a suit by JPMorgan against its own insurers. What happened was that in 2006, Bear Stearns entered a $250 million consent agreement with the SEC which included the boilerplate "neither admit nor deny" language. Bear and its successor, JPMorgan Chase, went to their insurers to cover the settlement, even though penalties are not covered. The insurers refused. JPMorgan sued on the basis of the no-admission language - and lost.

“Read as a whole,” the [Appellate Court] decision said, “the offer of settlement, the SEC Order ... and related documents are not reasonably susceptible to any interpretation other than that Bear Stearns knowingly and intentionally facilitated illegal late trading for preferred customers, and that the relief provisions of the SEC Order required disgorgement of funds gained through that illegal activity.”

That is, the Appellate Court ignored the boilerplate as not affecting the overall reading. It was, in effect, irrelevant.

And this week, the SEC changed its policy on the boilerplate.

The Securities and Exchange Commission, in a fundamental policy shift, said Friday that it would no longer allow defendants to say they neither admit nor deny civil fraud or insider trading charges when, at the same time, they admit to or have been convicted of criminal violations.

The change is the first time that the S.E.C. has stepped back from its longstanding practice of allowing companies to settle fraud charges by paying a fine without admitting wrongdoing.

The impact is smaller than it might seem at first because the agency said it would continue to use the language where the agency alone reaches the agreement with the accused and there is no associated criminal case; such individual agreements make up a large majority of SEC settlements - and are the kind that draws Rakoff's particular ire.

But despite the SEC's CYA claim that the change had been under consideration for several months, I don't see how it can be denied that Rakoff's raising of the issue to the level of broader awareness (along with the efforts of others :cough: OWS :cough:) has played a key role in pushing things as far along as they have gone.

Footnote: The identity of the man in the linked video is still unknown. Rumors abound but evidence does not.