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OSC's new settlement tack will change the game

Citigroup’s $285-million SEC settlement allowed the bank to resolve the matter ‘without admitting or denying’ any wrongdoing.

Spencer Platt/Getty Images/Spencer Platt/Getty Images

In Citigroup's recent deal to pay $285-million (U.S.) to settle charges by the U.S. Securities and Exchange Commission that it misled investors, the U.S. banking giant might take some comfort from a bit of fine print.

As in almost every other SEC civil case, the settlement with Citigroup Inc. notes that the bank agreed to resolve the matter "without admitting or denying" any wrongdoing.

The boilerplate is tacked onto SEC's allegations that the bank sold investors $1-billion worth of derivatives linked to the ill-fated U.S. housing market in 2007 – and then turned around and bet against those same investments. The allegations, similar to those levelled against Goldman Sachs Group Inc. and other Wall Street titans, point to the root of the financial crisis.

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These no-admission clauses are the SEC's long-standing practice in civil cases, and proponents say they dramatically speed up settlements, sparing the time and expense of a trial.

Until now, such arrangements were not an option for anyone facing similar allegations from the Ontario Securities Commission. But last week, the OSC said it too plans to allow such SEC-style "no contest" settlements.

The move comes, however, as the SEC's own practice south of the border faces increasing scrutiny. That very Citigroup settlement now goes for approval before a federal judge in New York who has been scathingly critical of this kind of deal.

Tom Atkinson, the OSC's director of enforcement, said no-contest settlements will allow the Ontario regulator to resolve cases more quickly. He said settlement talks currently bog down over admissions of liability because those accused of securities violations are worried about the fuel such an admission gives to lawsuits launched by angry investors.

"A lot of times what we argue about now are the admissions as opposed to the penalty anyway," Mr. Atkinson said. "They're more concerned about attracting class actions, so it makes it impossible to resolve these things."

It won't be an option for every fraudster or illegal insider trader the OSC catches, however. Only first offenders, and only those who co-operate, will be offered such a settlement, Mr. Atkinson said.

He argues the policy will allow the OSC to issue its orders and fines, punish alleged wrongdoers and send a warning to others, all without the years-long delay of trials and appeals. "What's really critical, given how busy we are, is that this allows us to divert critical resources to better protect investors in other matters."

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Meanwhile, the SEC's practice may be facing a new challenge. The Citigroup settlement is due to go before Judge Jed Rakoff of the federal District Court in Manhattan for approval. Judge Rakoff has a history of challenging SEC settlements, says Michael Koehler, an associate professor of business law at Butler University in Indianapolis.

The judge initially rejected a 2009 settlement between the SEC and Bank of AmericaCorp. over the bank's acquisition of Merrill Lynch, although he would later approve the deal. And in March of this year, while approving an SEC settlement in a fraud case, he took the agency to task for its no-contest settlements.

The judge said the deals create "a stew of confusion and hypocrisy unworthy of such a proud agency as the SEC."

It is easy to understand why the SEC's no-contest settlements are equally popular with both the agency and defendants, Prof. Koehler says, as it makes life easier for both of them. The SEC rarely has to actually prove its case in court, and defendants are spared from making an admission that could cost them in lawsuits from investors down the road.

"The problem is, I don't know if this serves the public interest," Prof. Koehler said. "It certainly serves the SEC's interest, and it serves the defendants' interest but at the end of the day … the public is left wondering well, 'Gee, what really went on here?'"

Ermanno Pascutto, executive director of investor rights group FAIR Canada and a former OSC executive director, welcomed the OSC's new no-contest settlements, provided that they will be used "sparingly."

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"I think you've got to give the OSC and the new chairman [Howard Wetston]credit for trying to improve the OSC's record of enforcement, both in terms of the quality and the quantity," Mr. Pasacutto said.

Jacob Frenkel, a former SEC enforcement lawyer now with the law firm Shulman Rogers Gandal Pordy & Ecker in Potomac, Md., defends the SEC's no-contest settlements, which have been standard practice for decades.

"Without such a tool for resolving SEC cases, and given the volume of securities litigation, there'd be an unbelievable logjam in the U.S. courts of parties unwilling to settle with the SEC," Mr. Frenkel said.

Alan Gardner, a Toronto lawyer with Bennett Jones LLP who has defended clients facing charges from the OSC and the SEC, praised the OSC's move, which he said will remove a major stumbling block in settlement talks with the provincial regulator.

"Oftentimes, that's the biggest sticking point in coming to these settlements," Mr. Gardner said. "So absolutely in my view it will speed up the settlement process."

Mr. Atkinson, the OSC's director of enforcement, said no one should think that the no-contest clause allows those who break the rules to get off scot-free, as the allegations against them will be clearly listed.

"It doesn't allow you to avoid public stigma for what you've done," Mr. Atkinson said. "Everybody understands that."

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About the Author
Toronto City Hall Reporter

Jeff Gray is The Globe and Mail’s Toronto City Hall reporter. He has worked at The Globe since 1998. From 2010 to 2016, he was the law reporter in Report on Business, covering Bay Street law firms and white-collar crime. He won an honourable mention at the National Magazine Awards for investigative journalism in 2010. More

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