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Admitting Guilt or Heftier Fines? The SEC's Call

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Does it matter if you admit guilt if you're paying the fine? Maybe it's a matter of how big the fine is.

Right now it's the admitting guilt part being put to the test at the Securities and Exchange Commission.

You see, historically when that agency catches a company doing something wrong … be it bending some numbers or fibbing to investors … it tends to force them into a settlement agreement. The company pays a fine but doesn't have to admit wrongdoing.


The SEC has tended to like this setup because it makes it easier to enforce the law, collect fines and move on. No messy tedious trials that take time, lawyers and resources.

The offending companies like it because they don't have to publicly declare guilt, which would set them up for private lawsuits by victims.

But a few lawmakers and jurists don't think it should work that way and have been leaning on the agency to change the process. And it looks like it will…at least a little bit. In a recent speech, the new SEC head, Mary Jo White, said the agency would start to demand companies admit guilt as part of a settlement…but only in a few cases. And she wasn't really clear on what those cases would be.

"It will be to some degree case by case, but obviously with some guidance for the staff as to what kinds of cases," she said at the Wall Street Journal's CFO conference in Washington, D.C. last week. "…You have to balance everything, strength of case, the harm done, how egregious the conduct was, and how important, perhaps, it is to get a quick resolution."

She amplified her comments in an interview with the New York Times columnist James Stewart.

"Compelling companies to admit guilt as a condition of a settlement may help prevent fraud. The approach may be helpful, but probably grossly insufficient," said Lev Janashvili, managing director of GMI Ratings, a group that follows corporate governance issues, in a statement to CNBC.

"The company either followed accounting principles (GAAP),or not; there are no uncertainties here," said Baruch I. Lev, a professor of accounting and finance at NYU. "So, I really don't see any reason to settle without admission. Companies have huge accounting and legal resources to contest the SEC. If they can't, they should clearly admit wrongdoing. From an educational perspective, you don't learn anything from a settlement without admission. The important educational benefits come only with a clear admission."

Rasmus Rasmussen | Vetta | Getty Images

Of course, one of the longstanding arguments against forcing a company to admit guilt is that it will prompt more resistance to SEC enforcement actions, and thereby result in less overall judgments.

"That may well be a result in some cases," said Harvey Pitt, a former SEC chairman. "I think that by doing this on a restricted basis at the outset, the SEC has given itself enough flexibility to pull back from the process if it finds it to be the result."

Perhaps the better action would be to concentrate less on the guilt and more on the fine. Many think SEC settlements are too small considering the amount of money financial companies typical rake in.

Indeed Prof. Lev estimates the median settlement for SEC settlements is a few million dollars, while many companies net revenue in the billions.

"The penalties are almost negligible," he said in an email response to questions.

So, if the current state of settlements at the SEC is inadequate, the choices seem to be forcing companies to admit guilt and opening them up to expensive lawsuits or just hitting them up with heftier fines (perhaps based on a percentage of revenues?) up front.

Tough call. But the agency seems to favor experimenting with the former. We'll see how it goes.

-- Allen Wastler is managing editor of CNBC.com. Follow him ... @AWastler