What Is Neither Admit Nor Deny?
SEC Settlements and DoJ Settlements Often Contain “Neither Admit Nor Deny” Provisions that Can Have Significant Consequences
If you are under investigation by the U.S. Securities and Exchange Commission (SEC) or another federal regulatory or law enforcement agency, one of the options on the table may be to negotiate a settlement. While settling can provide a desirable path forward in many cases, it is important to make sure that your settlement agreement contains all of the necessary language to protect you against future legal exposure. In many cases, this means including “neither admit nor deny” language in your settlement agreement.
“NAD” stands for “neither admit nor deny.” When an individual or company enters into a settlement agreement or consent decree with the SEC or other federal authorities, it is common for the agreement to state that the individual or company, “neither admits nor denies,” the government’s allegations.
Why Include “Neither Admit Nor Deny” Language in a Settlement Agreement?
Typically, the agreement will recite that the government’s allegations are only allegations, and the agreement will include a clause stating that its inclusion of “neither admit nor deny” language is not an admission of liability. These clauses are important, as they:
- Make clear that the individual or company is not admitting to wrongdoing (i.e. securities fraud or other securities-related violations, financial crimes, or other offenses);
- Make clear that the government’s allegations are simply allegations; and,
- Prevent the government’s allegations from being used against the individual or company in subsequent civil or criminal litigation.
As the U.S. Court of Appeals for the Second Circuit stated in SEC v. Citigroup Global Markets, Inc.:
“Federal courts have held for decades that a consent decree is not an admission of legal liability, nor is it a concession by the SEC that the allegations lack merit. . . . The Supreme Court has also long recognized that consent decrees serve a different function than consent judgments and are not intended to ‘contribute . . . to development of legal precedent.'”
Additionally, as the SEC and other federal authorities routinely note in their press releases, “neither admit nor deny” settlement agreements and consent decrees are “not a finding of fault.” They simply represent a conclusion to a matter that both parties – the government and the individual or company under investigation – have agreed to in order to mitigate the costs and risks of litigation.
Examples of Recent “Neither Admit Nor Deny” Settlements and Consent Decrees
To illustrate the types of circumstances under which individuals and companies may benefit from entering into “neither admit nor deny” settlements and consent decrees, here are the facts (as alleged) from three recent SEC enforcement actions:
1. SEC Charges Real Estate Investment Company and Executives with Securities Offering Fraud
In an SEC enforcement action involving real estate investment company EquiAlt LLC and its senior executives, the SEC alleged that the company “sold more than $170 million of securities to nearly 1,100 investors.” It further alleged that, “EquiAlt promised investors that at least 90% of funds raised from the offering would be used to purchase real estate properties, and that the properties would generate the returns to pay investors 8-10% annual interest. In reality, a large portion of investor money went to support the executive’s lavish personal spending.” With the defendants’ consent, the court issued an order containing “neither admit nor deny” language.
2. SEC Charges Investment Advisor and Chief Investment Officer with Defrauding Investors in Closed-End Fund
In a case involving an investment advisor and its chief investment officer, the SEC alleged that the defendants, “illegally profited from undisclosed cross trades with an affiliate that had the effect of favoring one client over another.” According to the SEC’s allegations, the defendants’ cross trades, “benefited the selling client at the expense of the purchasing client,” and involved securities that were, “not priced at arm’s length and were not consistent with the fund’s valuation procedures.” The investment advisor and chief investment officer agreed to a settlement agreement that included “neither admit nor deny” language.
Is it Worthwhile to Pursue a “Neither Admit Nor Deny” Settlement or Consent Decree?
These are just a few examples. The SEC enters into “neither admit nor deny” settlements and consent decrees under a broad range of circumstances and in cases involving both civil and criminal allegations. So, is it worthwhile to pursue a settlement or consent decree containing “neither admit nor deny” language? Here are some key considerations:
- Litigating Against the Government is Expensive and Time-Consuming – Even if you are able to successfully defend yourself or your company against criminal allegations, doing so could take years and cost hundreds of thousands of dollars in legal fees.
- Litigating Against the Government Can Present Reputational Risks – Along with being costly, defending against criminal allegations can also present reputational risks. These risks can be particularly significant in cases involving allegations of financial crimes such as securities fraud, accounting fraud, and insider trading. However, a “neither admit nor deny” settlement or consent decree will typically be less damaging than an indictment or criminal conviction.
- The Government May Be Willing to Accept a Settlement or Consent Decree – In many cases, even if the government’s investigation has progressed to the point of a criminal complaint or indictment, it may still be willing to accept a settlement or consent decree with “neither admit nor deny” language. Ultimately, defending in court is costly for the government as well, and it will often make sense to bring an enforcement action to a close with a settlement or consent decree.
- Settlement and Consent Decree Negotiations Can Be Lengthy – While it is possible to resolve an SEC enforcement action with a settlement or consent decree at various stages of the investigation and litigation process, it is important to understand that settlement and consent decree negotiations can be lengthy. As with criminal litigation, negotiating a settlement or consent decree involves numerous complex legal and factual issues, and it is extremely important to ensure that adequate protections are in place.
- You Lose All Control Over the Process Once You Go to Court – If you go to court, you lose control over the outcome of the case. There are no guarantees that you will be able to avoid a conviction, and if you are unable to negotiate a favorable settlement or consent decree at this stage, you will be relying on a judge or jury to accept your defenses and acquit you of the government’s charges.
7 Key Components of an Effective “Neither Admit Nor Deny” Settlement Agreement or Consent Decree
With these considerations in mind, if you are thinking about pursuing a settlement or consent decree with the SEC (or the DoJ, IRS, or another federal agency) containing “neither admit nor deny” language, what are some of the other key terms to include in your agreement? Here are seven key components of an effective “neither admit nor deny” settlement agreement or consent decree:
- The Agreement Clearly States that You Are Not Admitting to Any Violations – While the inclusion of “neither admit nor deny” language can help protect you from the government’s allegations, it is also important to include additional language stating that you are not admitting to any alleged violations.
- The Agreement Clearly States that You Are Not Denying Any Violations – The agreement should also state that you are not expressly denying any of the government’s allegations. Once again, the allegations are just that – allegations – and you are not taking a position on their validity.
- The Agreement Clearly States that the Government’s Allegations are Only Allegations – The agreement should also state that the government’s allegations are only allegations. The agreement should also include language stating that the government is not conceding that the allegations lack merit.
- The Agreement Includes a Term that Limits the Possibility of Charges Being Filed in the Future – If the government has not yet filed charges, or if it has not filed all of the charges it could potentially file, the agreement should include a term that limits the possibility of additional charges being filed in the future. At the same time, the agreement should include a term stating that it does not waive the government’s ability to pursue further charges in the event that it uncovers additional evidence during the course of its investigation or as the result of new complaints.
- The Agreement Includes a Term that Limits the Possibility of Private Litigation – The agreement should also protect you against the possibility of private securities litigation resulting from the government’s allegations. If you are agreeing to pay a penalty, the agreement should state that this penalty is not to be construed as “a finding of fault.”
- The Agreement Clearly States that the Agreement Is Not an Admission of Liability – Again, the agreement should also clearly state that the agreement is not an admission of liability. It should also include language stating that it is not to be interpreted as a contribution to the development of legal precedent.
- The Agreement Includes Provisions that Protect You from Administrative, Civil, and Criminal Liability – All of the above provisions should apply with respect to administrative, civil, and criminal liability. In order to achieve their intended purposes, “neither admit nor deny” settlement agreements and consent decrees must provide comprehensive protection.
