A lawsuit begins by a plaintiff filing a “Complaint,” which largely consists of unproven allegations. The defendant responds with an “Answer” that typically denies the truth of most material allegations. Since most lawsuits involve private disputes, no one besides the parties much cares if the case subsequently settles without the allegations being proved or disproved. But when a federal administrative agency like the Securities and Exchange Commission not only brings a lawsuit alleging significant fraud, but also deems the lawsuit sufficiently important to file it in federal court, the public is alerted that very serious misconduct is being alleged. The public thus has an obvious interest in knowing whether such serious allegations made by a government agency are true or untrue. The SEC’s policy of allowing such federal lawsuits to be settled without the defendant admitting or denying the truth of the allegations thereby directly deprives the public of both transparency and accountability.

To its credit, the SEC in 2013 somewhat modified the policy from its previous all-encompassing scope under which even convicted criminal defendants who had pleaded guilty to the same allegations contained in the SEC’s complaints against them were still allowed to settle without admitting their misconduct. The SEC now requires admissions in some cases (including the aforementioned parallels to criminal cases). However, the total number of cases in which the SEC has required admissions of misconduct has accounted for only a small fraction of SEC settlements; the great majority are still on a basis of the defendants’ neither admitting nor denying the core allegations.

This continued predominance of the “neither admit nor deny” policy—in addition to impeding transparency and accountability—also means that wrongly accused parties are incentivized not to prove their innocence if they can get a cheap settlement without admitting anything. By the same token, the SEC can avoid having to litigate questionable cases by the simple expedient of offering a cheap settlement. And to make matters worse, the SEC hides the flimsiness of such cases from the public by imposing a “gag” order that prohibits the settling defendants from contesting the SEC’s allegations in the media (though not in a court of law, should further litigation transpire).

[T]he SEC’s “neither admit nor deny” policy promotes little more than administrative convenience, and does so at the expense of truth and justice.

The excuse the SEC most commonly gives for allowing “neither admit nor deny” settlements is to conserve resources. But this presupposes that defendants, if forced to choose between admitting the SEC’s allegations and going to trial, would go to trial. If, however, as the SEC believes, the cases it brings in federal court are strong ones, then most defendants would still settle even if they had to admit the allegations—so the difference in expenditure of resources would be modest. Conversely, if many cases brought by the SEC are not as strong as the SEC believes and so won’t settle if the defendants are forced to admit the allegations, is it not useful for the SEC to learn this lesson in determining how best to deploy its resources?

The “scarce resource” argument misconstrues the ultimate purpose for which the SEC brings securities fraud lawsuits in federal court: to maximize deterrent effect. It seems obvious that a high-visibility federal trial that culminates in victory for the SEC would have a much greater deterrent effect on would-be wrongdoers than quick settlements that are in the news for no more than a day. Even assuming for the sake of argument that doing away with “neither admit nor deny” settlements would lead to more cases going to trial, such would be a far better use of the SEC’s resources than the often meaningless settlements obtained under the “neither admit nor deny” policy.

From a judicial perspective, the easy promotion of “neither admit nor deny” settlements also prevents many cutting-edge legal issues from ever getting decided, and thus inhibits the development of the law.

As for defendants, they attempt to justify the “neither admit nor Deny” policy on the grounds that this is the way things have always been done and that if they had to actually admit misconduct in their settlements with the SEC, it would make them less able to defend private actions brought against them by victims of the misconduct. As to the first justification, past persistence of a flawed policy is no reason to continue it; and as to the second, the notion that one should be able to avoid compensating the victims of one’s fraud by denying misconduct one would otherwise be prepared to honestly admit to the SEC sounds hypocritical, if not downright dishonest.

In short, the SEC’s “neither admit nor deny” policy promotes little more than administrative convenience, and does so at the expense of truth and justice.

Jed S. Rakoff has served since 1996 as a federal district judge in Manhattan and since 1988 as an adjunct professor at Columbia Law School.

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