Court Approves SEC No-Admit Deal With Analyst

By Yin Wilczek  

April 23 --The U.S. District Court for the Southern District of New York April 22 approved an agreement between the Securities and Exchange Commission and Roland Dennis, a former analyst at SAC Capital Advisors affiliate CR Intrinsic Investors LLC, to settle insider trading allegations.

However, Judge Harold Baer Jr. added in the court's final judgment that he had “no knowledge as to whether” the settlement is “unfair, unreasonable or inadequate” but signed off on it in reliance on the SEC and defendant's representations.

Dennis did not admit or deny the SEC's allegations. The defendant agreed under the settlement to pay the SEC $203,000 in disgorgement, prejudgment interest and civil penalties, and to be barred from future violations.

The SEC announced the settlement agreement March 13.

Inside Tips

According to the SEC's complaint, two hedge fund analysts tipped Dennis to inside information about impending announcements at Dell Inc. and Foundry Networks Inc. “Armed with inside information, Dennis prompted illegal trades in Dell and Foundry stock and enabled hedge funds managed by SAC Capital and affiliate CR Intrinsic Investors to generate illegal profits and avoid significant losses,” the agency alleged.

When the SEC submitted the agreement to the court for its approval, Baer expressed concern that the SEC did not require Dennis to admit or deny its allegations, and questioned whether a hearing wasnecessary.

The SEC subsequently told the judge in an April 3 letter that a district court's role in reviewing a proposed SEC consent judgment is limited. As the U.S. Court of Appeals for the Second Circuit “has explained, '[u]nless a consent decree is unfair, inadequate, or unreasonable, it ought to be approved,'” the commission said.

The SEC also told Baer that since December 2011, “at least 21 courts in 28 different cases in the Southern District of New York” have approved “commonplace” SEC consent judgments where the defendants did not admit or deny the allegations.

In response, Baer scribbled in the margins of the SEC's letter, “As the Circuit points out we take your word 'unless the Consent Decree is unfair inadequate or unreasonable' and then all bets are off. Here my problem is how can I really know the answer?” However, the judge also said that he would reconsider the settlement papers, and “perhaps come out your way.”

Second Circuit Review

The Second Circuit still is reviewing whether Judge Jed Rakoff--also of the Southern District of New York--properly rejected the SEC and Citigroup's proposed $285 million settlement in 2011 to resolve allegations over the firm's role in a questionable collateralized debt obligation.

In questioning the settlement, Rakoff said that the parties provided scant facts upon which to determine the adequacy of the pact. He also faulted the SEC's long-standing policy of allowing defendants to neither admit nor deny the allegations when entering into a settlement (27 CCW 259, 8/22/12).

The Second Circuit heard oral argument in the case in February 2013 but has not yet issued a decision (28 CCW 19, 1/16/13).

Two months after she was sworn in, SEC Chairman Mary Jo White announced in June 2013 that the commission would try to obtain admissions from defendants in certain limited instances, including egregious misconduct (28 CCW 193, 6/26/13). Some observers have suggested that the announcement was in part a strategic move to strengthen the agency's position in the Citigroup case.

Admissions of Liability

Since that time, the SEC has obtained admissions in several cases.

New York-based Covington & Burling LLP partner David Kornblau told Bloomberg BNA that like Baer and Rakoff, judges are questioning the SEC's settlements more frequently. “If more judges take the next step and reject SEC settlements, the SEC may seek to avoid judicial review by filing settlements administratively instead of in federal court,” he said.

SEC Enforcer on Admissions

Meanwhile, SEC Enforcement Director Andrew Ceresney made remarks April 25 on the SEC's policy of obtaining admissions at the Practising Law Institute's Enforcement 2014 conference. Once the SEC decides to seek an admission of liability in a case, that decision will not be open to negotiation during settlement talks, Ceresney said.

Ceresney said he expressed his own views, which did not necessarily reflect those of his organization.

“I think it's important for us when we decide to seek admissions to not have that be a negotiation point,” Ceresney said. The commission will want an admission where accountability is important for the programmatic needs of the case, he said. Ceresney also said defendants for their part cannot offer admissions to lower their penalties or reduce other sanctions.

To ensure there is a “centralized approach” to the process, Ceresney said he is the one that ultimately decides if admissions should be sought. He added that he did not expect the commission over time to require admissions in all, or a majority, of its cases. However, the number of admissions may “well increase” as they become more accepted and less critical in the negotiation process.

 

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Susan Jenkins sjenkins@bna.com


The SEC letter is available at http://www.bloomberglaw.com/public/document/Securities_and_Exchange
_Commission_v_Dennis_Docket_
No_114cv01746_/2
.

The court's final judgment is available at http://www.bloomberglaw
.com/public/document/Securities_and_Exchange
_Commission_v_Dennis_Docket
_No_114cv01746_/1
.