Tuesday, August 20, 2013

Under New Policy, SEC Extracts Admission of Wrongdoing

According to an article published on The New York Times website, the Securities and Exchange Commission extracted an admission of wrongdoing for the first time in a high profile action.
Philip A. Falcone, manager of the hedge fund Harbinger Capital Partners, will admit to wrongdoing in connection with market manipulation charges.  The settlement will ban Falcone from the securities industry for at least five years.  Additionally, he will pay disgorgement and penalties of $11.5 million while Harbinger pays $6.5 million.  The case arises out of charges that Falcone manipulated the market by improperly using $113 million in Harbinger assets to pay his taxes.
In the settlement Falcone will agree that he acted "recklessly" in several market transactions.  In securities law, "recklessness" meets the mental standard necessary for culpability.  Historically, the SEC settled cases without the defendant admitting to wrongdoing.  In these cases the settlement would make reference to the fact that the defendant neither admitted nor denied wrongdoing.  Further, in such settlement documents, the parties would agree to the sanctions imposed on the defendants.
The failure to include acknowledgement of culpability historically meant that any private claimant civil suits against the defendants could not rely on the principle of res judicata to establish culpability.  Thus, any private actions became much more difficult and protracted.  It will be interesting to see what effect the acknowledgment of wrongdoing by Falcone has on the number of private actions filed in the wake of the settlement.
Another aspect to monitor is whether the SEC requires admissions of wrongdoing with large banks and hedge funds larger than Harbinger.  For instance, the agency is pursuing a settlement with JPMorgan over its multibillion-dollar trading loss in its London office.  Will there be a settlement with the bank that admits wrongdoing by the entity, named officials of the bank, both the bank and officials, or will the requirement break negotiations leading to a trial in federal court?  The case bears monitoring for the answers.

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