Late Friday afternoon, SEC Enforcement Chief Robert Khuzami announced that the Commission adopted a fundamental policy shift in the way would settle certain types of cases - particularly those involving civil fraud and insider trading charges.  No longer would the SEC allow companies to agree to enter into a settlement while neither admitting nor denying civil fraud or insider trading charges - if they have simultaneously pleaded guilt to or been convicted of related criminal charges.

Under the new policy, a civil settlement agreement will cite the admission of conduct or conviction in the corresponding criminal case, according to Mr. Khuzami.  However, the SEC enforcement staff will have discretion to use or not use relevant facts from the criminal case in its own court documents for the civil case.

This marks the first time that the SEC has stepped back from its longstanding practice of allowing companies to settle fraud charges by paying a fine without admitting wrongdoing. It will apply to companies and individuals.

SEC's 'Neither admit nor deny ...' Settlements to Continue. Khuzami, said the agency would continue to use the “neither admit nor deny” settlement process when the agency alone reached a deal with a company in a case of civil securities law violations. Those types of cases make up a large majority of SEC settlements.

The commission has been sharply criticized by federal judges and Congressional leaders for allowing companies to repeatedly settle fraud cases without admitting or denying the charges.  Until last week, that policy had been applied even when a company acknowledged the same conduct to another government agency, often the Justice Department.

Issues with 'Cease and Desist' Settlement Terms. Though not as contentious as the "neither admit nor deny" issue, the requirement that individuals and companies entering into an SEC settlement must cease and desist from committing or causing any violations of securities laws and regulations has "ruffled the feathers" of government officials.  The problem here is that many of the firms repeatedly violate securities laws even though they are bound by "cease and desist" obligations.  Making matters worse is that the SEC has shown little or no interest in sanctioning such firms for their repeat violations.

Federal District Court Judge Jed Rakoff. While the judge's rejection of an SEC settlement with Citigroup in November didn't kick off the debate on the "neither admit nor deny" issue, it certainly struck a nerve in Americans who were already anti-Wall Street.  Judge Rakoff particularly raised concern that the settlement language deprived the court of the facts necessary to determine if the punishment was adequate because it meant that there were no established facts on which to base a decision.

Impact on Citigroup Case. The Citigroup case will not be affected by the policy change, because there is no accompanying criminal charge.  The SEC has appealed Judge Rakoff’s rejection of its Citigroup settlement.  [Dealbook 1/6/12]