August 06, 2013

SEC Enforcement: To Settle or Not to Settle Prior to Suit?

There are known, and unknown, consequences to entering into a settlement agreement with
SEC Enforcement prior to the time that a lawsuit is filed.


If you have been in the securities industry for any period of time, you have undoubtedly seen an SEC Litigation Release discussing the SEC’s interpretation of events, followed by a statement that the party accused of wrongdoing, “without admitting or denying the allegations,” agreed to settle the SEC’s charges. What exactly does that mean, and what are the consequences of entering into a settlement with the SEC?

Leading Up to Settlement

First, remember that an SEC Enforcement Action is not a criminal matter, but is a civil matter typically at risk of being brought by the SEC in the Federal District Court. If the SEC believes that criminal violations have occurred, they will typically refer the matter to the U.S. Attorney’s Office, and a separate action will be brought (a so-called “parallel action”).

SEC Enforcement matters usually begin with a Formal Order of Investigation, which are now issued by the regional offices (as opposed to SEC headquarters). The main function of a Formal Order of Investigation is to acknowledge that the SEC has reason to believe that a violation may have occurred, and to give them subpoena power to request documents and testimony in order to make a determination.

If you receive a subpoena, it is customary to ask the SEC for a copy of the Formal Order of Investigation, and it is customary for it to seem vague and drafted in generalities, other than to confirm that an investigation is underway and that this is a matter to be taken seriously. Our advice to parties that receive a subpoena is to retain counsel immediately so that, at a minimum, your responses to the subpoena are accurate, concise, and formatted properly. A subpoena may be issued requesting documents, a parties verbal testimony (under oath), or both.

Following one or more rounds of subpoena- response, the SEC may be willing to discuss their findings with your counsel, and provide some insight as to where the matter might be headed. This is one of several opportunities for your counsel to look for openings to informally discuss settlement of the matter.

Settlement Discussions

Settlement discussions vary widely, depending on the strength of the government’s case, the strength of your defense, and the relationship between the parties and counsel. In my experience, after the discovery process is complete (remember that the SEC is likely in the discovery process with numerous other parties related to the same matter), the SEC will entertain settlement discussions at this time, prior to a lawsuit being filed.

Settlement offers must come from the affected party, they do not originate from the government. Normally, there can be some verbal discussion about the range of settlement offers that will be considered, but all formal offers must be in writing. This is where it is very important to include terms and conditions, in addition to the payment of money and/or future restrictions on activity in the securities industry. Examples include that a settlement is conditioned on the accused party not admitting or denying the charges, whether and when public announcement of the matter will be made, and the specific language contained in that public announcement.

A reasonable amount of back-and-forth negotiation can take place, and this is another important time to have experienced counsel who can sense how far to push the issue before putting the decision to the client. The next step for the SEC is to file a lawsuit, which exposes the client to another level of costs, time, exposure, and risk.

Settlement Deal Points

What is normally on the table when it comes to negotiating a settlement? Of course that depends on the facts and circumstances of the case, but common elements include:

  • Monetary fines;
  • Monetary disgorgement;
  • “Neither admit nor deny” language;
  • Timing and content of public announcements;
  • Consent to the filing of a proceeding in District Court, with a simultaneous Order of Settlement;
  • Civil injunctions (including a bar from the industry or from certain activities, including length of time); and
  • Follow-on administrative proceedings (affecting future licensure, including length of time).

The Director of Enforcement, Robert Khuzami, testified before the U.S. House of Representatives Committee on Financial Services on May 17, 2012 and outlined many of the SEC’s theories and strategies. His statement can be found here.

Settlement Procedures

Again, it depends on the facts and circumstances of the case, but typically a settlement offer that is conveyed in the form of a letter is accepted, and then the SEC will prepare a draft set of documents to include:

  • Offer of Settlement and Proposed Order Instituting Administrative Proceeding;
  • Document Production Certification;
  • District Court Consent and Final Judgment; and
  • Escrow Agreement concerning funds.

There is ample room to negotiate the language contained in some of these documents, as well as the timing of their filing. The documents will contain some of the SEC’s allegations, which can be troublesome to clients because, while they have the opportunity to state that they deny the allegations, they are nonetheless now in writing in a public document.

If monetary penalties or disgorgement are being paid, the SEC likes to have the funds placed into escrow with the parties’ counsel and subject to the escrow agreement. Payment terms, while available, are disfavored and difficult to negotiate. On the other hand, reasonable requests for waiver of penalties and disgorgement based on financial hardship are often granted.

Once all the documents are agreed upon, they will be filed with the appropriate Court, and the SEC will publish the result in a Litigation Release. If the matter is considered significant, the SEC may also publish a press release.

Settlement Consequences

As with any litigation or threatened litigation, there are pros and cons to a settlement. It is important to consider these fully before and as part of your negotiation strategy. Some of the more common observations I have made include:


  • Bring closure to the pending investigation;
  • Bring an end to ongoing legal fees;
  • Have certainty in the final outcome, including the possible retainment of professional licenses and the ability to work in the industry;
  • Have input on the content of public announcements.


  • Publication of the proceeding, essentially indefinitely;
  • Payment of fines, penalties, and or disgorgement;
  • Public perception;
  • Possible loss of professional licenses and the ability to work in the industry;
  • Inability to obtain professional licenses in the future.

Closing Thoughts

Ultimately, the decision whether or not to settle an SEC investigation prior to trial is a very personal one, and there are a myriad of factors to consider. The important thing is that you have considered these factors, discussed them with your stakeholders, including your attorney, family, co-workers, and other trusted advisors, and made an informed decision. It is very unlikely that you will be completely satisfied with the settlement terms you are able to negotiate, but if you make an informed and well thought out decision, there is a good chance you won’t make a decision that you regret.