Judicial Notebook

In the wake of the recent financial crisis, many investors were left wondering whom to blame. Occupy Wall Street and other critics argued that investment firms and brokers needed to be held accountable for their roles in the crisis. The Securities and Exchange Commission (SEC), the federal agency responsible for enforcing investment laws, investigated many allegations of wrongdoing and, in many cases, filed charges. One case that attracted media attention was filed against the investment giant Citigroup. Along the way, the SEC's handling of the Citigroup case has drawn attention to an unpopular SEC policy that raises questions of guilt, blame and the role of attribution of responsibility in regulatory law.

In 2011, the SEC charged Citigroup with negligence in the handling of a housing market-related investment product. The product, a collateralized debt obligation (CDO), was based on investments in subprime mortgages and cost investors hundreds of millions of dollars when it went into default. According to the SEC, Citigroup misled investors about the independence of the investment and failed to inform them that Citigroup stood to make millions if the product failed; Citigroup's own investment allegedly netted it over $160 million. After the charges were filed, the SEC and Citigroup agreed to settle the case by requiring Citigroup to relinquish its profits, with interest, to the SEC, pay a civil penalty of $95 million and submit to three years of increased monitoring. As part of the deal, however, the SEC would allow Citigroup to settle without admitting or denying the SEC's allegations.

New York District Judge Jed S. Rakoff rejected the proposed settlement, sharply criticizing the "no admit or deny" provision (U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 2011). The judge argued that he could not evaluate whether the proposed settlement was fair or in the public interest because the settlement included no admitted wrongdoing about which the parties officially agreed. More important, he argued, "there is an overriding public interest in knowing the truth." Despite the SEC's insistence that "no admit or deny" provisions encourage faster and more efficient resolution of cases, the judge held that the settlement "leaves the defrauded investors substantially short-changed." The SEC and Citigroup have appealed Rakoff's decision to the 2nd Circuit Court of Appeals, where it is pending.

Rakoff's opinion echoes critics who charge that the "no admit or deny" policy allows defendants to escape public accountability. While the settlements forbid defendants from directly denying the allegations, defendants avoid public presentation of the SEC's evidence. Although the SEC no longer allows "no admit or deny" provisions in cases in which the defendants face criminal charges, defendants who face civil lawsuits are free to contest the allegations in those proceedings.

For social scientists interested in the legal process, the SEC's policy raises some thought-provoking questions. At the heart of many criticisms of "no admit or deny" provisions is a sense that the settlements are not fair to those who lost money because the defendant is not forced to admit wrongdoing. Accordingly, blame, the admission of wrongdoing or responsibility, and public accountability all play a role in responses to individual settlements and to the broader SEC policy.

SEC cases are somewhat unusual in that the victims of the alleged wrongdoing are not parties to the lawsuit; they do not participate in the case and they do not receive any of the settlement proceeds. Thus, researchers might ask how such admissions influence the negotiation behavior of the SEC in its role as regulator and of the defendants who prefer not to make them — and how the details of the settlements are affected. In addition, researchers might explore how those who were harmed react to settlements with and without specific admissions — reactions they experience even though, or perhaps because, they are not parties to the agreement. Any effects may also go beyond the SEC, the wrongdoers or the direct victims, also impacting the views of those affected by the broader financial crisis.

Judicial Notebook is a project of APA's Div. 9 (Society for the Psychological Study of Social Issues).