Getty Images The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.

The Securities and Exchange Commission has changed the language it will use in settlement agreements, eliminating the familiar "neither admit nor deny" that has shielded many a firm from civil lawsuits. But the change will only apply to defendants whose guilt has already been established in a criminal proceeding, where a higher standard of proof is required than in civil courts. This development, not coincidentally, follows Federal District Court Judge Jed Rakoff's rejection of a $285 million settlement between the SEC and Citigroup on a mortgage fraud matter. Judge Rakoff said the "neither admit nor deny" language leaves him without a way to gauge fairness. He also called the $285 million "pocket change."

Andrew Stoltmann is an attorney and investor advocate in Chicago who concentrates on representing victims of investment fraud. He has represented over 700 individuals in lawsuits and securities arbitration actions against brokerage firms like Merrill Lynch, Morgan Stanley Dean Witter, Wachovia, Linsco, Prudential, Baird, Edward Jones, AG Edwards and Smith Barney.

LRS: You say the SEC's change in language doesn't go far enough ?

Stoltmann: The recent change only covers the most egregious of conduct rather than the vast majority of day to day settlements. It is an attempt by the SEC to appear tough on those who are violating the federal securities laws, but in reality it is too little too late.

LRS: You think the SEC is worried about how it will look in an important case coming up ?

Stoltmann: The Allen Stanford trial begins in two weeks and will likely provide a major black eye for the SEC. Not only did they repeatedly fail to catch Stanford, despite dozens of regulatory red flags, they also sued SIPC two weeks ago to cover Stanford's losses. The SEC is putting on a major PR offensive.

The Stanford trial is the SEC's biggest nightmare come true. The Bernie Madoff case ended without a criminal trial being necessary. But in the Stanford trial, all the lapses, all the failures will come to light. With witnesses under oath, everything will be exposed.

LRS: Will the SEC prevail in its appeal of the settlement rejected by Judge Rakoff ?

Stoltmann: To think that Judge Rakoff needed to hold the SEC's feet to the fire in order to protect investors is incredible. It takes something like that to get the SEC to make a change.

The SEC, of course, has appealed it. I dont think they'll win. If they don't, it's cataclysmically bad for the SEC. Because then you don't just have Judge Rakoff, but an appellate court saying the settlement is insufficient, and it'll be law. Right now you could argue that you have one maverick judge saying "neither admit nor deny" is insufficient. But after an appeals court says so, that's a lot different. Of course, they could appeal to the Supreme Court, but the Supreme Court only takes maybe 1% or 2% of the cases it receives.

LRS: Could there be a trial if the settlement is thrown out?

Stoltmann: I don't think there'll be a trial, but the SEC will have to extract more money from Citi, and they'll have to extract an admission of guilt. And that's horrible for Citi, because it can be used in all the civil cases against them.

LRS: Will this help protect investors in any way?

Stoltmann: I don't think there's any question that Judge Rakoff's logic will go a long way toward protecting investors. When you have someone who's caught with his hand in cookie jar, you have to make sure they pay the price. The price is an admission. It helps investors recover their money.

LRS: What do you see ahead for the SEC?

Stoltmann: The SEC is in a fight for its life. Since Madoff, the SEC and Mary Schapiro have been in the crosshairs. They're fighting for their budget and their lives.

LRS: What might be the broader impact?

Stoltmann: The big picture is that if other courts become emboldened by Judge Rakoff, it could have a very negative impact on the SEC. The SEC doesn't have the stomach to fight brokerage firms and financial institutions. They want to settle, get the headlines and move on.

LRS: Do you foresee the end of the SEC?

Stoltmann: I see a severely neutered SEC. This may cause the SEC to go after only the really egregious cases. But something has to be done. This Congress won't allow the SEC to hire new lawyers, new investigators. So the SEC will have to focus, and scale back its activities.

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