Judge Jed S. Rakoff, of the Southern District of New York, has recently been skeptical of settlement agreements executed by the SEC. In the recent Bank of America-Merrill Lynch case, the judge said that the Commission's proposed settlement did not "comport with the most elementary notions of justice and morality." The judge has a new target now, the Commission's practice of accepting settlements in which the defendants neither admit nor deny the agency's allegations.
The case, Vitesse Semiconductor Corp., involved allegedly fraudulent revenue recognition and options backdating practices. The SEC reached settlement agreements with three defendants, and submitted the arrangements for the district court for approval.
Judge Rakoff wrote that the "neither admit nor deny" practice was "troubling." According to the judge, the practice creates "stew of confusion and hypocrisy unworthy of such a proud agency as the SEC." He concluded that "only one thing is left certain: the public will never know whether the SEC’s charges are true." In his words, "the disservice to the public inherent in such a practice is palpable."
The judge recognized, however, that in this case, the issue was less important because two of the individual defendants had admitted guilt in parallel proceedings and the company had let its "money do the talking" by contributing large sums of cash and stock to the settlement fund.
Under these "unusual circumstances," the judge approved the settlements. He cautioned, however, that he reserved "for the future substantial questions of whether the court can approve other settlements" that involve the practice of defendants who neither admitting nor deny the charges against them.
Vitesse Semiconductor Corp., 10 Civ. 9239 (JSR)