Consent orders, introduced by SEBI in 2007 was by no means a novel concept. The SEC had adopted the settlement procedures years ago and had implemented it successfully. Consent orders have come under scrutiny earlier this year by a petition filed in the Delhi High Court.
Consent orders were introduced in 2007 by SEBI as a means to provide a wider array of enforcement actions thereby achieving the twin goals of an appropriate sanction and deterrence without resorting to long drawn litigation. Consent orders are defined as “order settling administrative or civil proceedings between the regulator and a person (Party) who may prima facie be found to have violated securities laws.” The power to enter into consent orders are found in section 15T of the SEBI Act. Consent orders can be passed in relation to any offence, and generally at any stage of the proceeding or investigation. An interesting feature of the consent order is the lack of any requirement of admission of guilty.
The petition filed by entrepreneur Deepak Khosla alleged that consent orders led to denial of disclosure of information to investors. This is because while adjudicatory order exposes the violators, their modus operandi and other aspects, these are generally kept confidential in consent orders. Further such orders cannot be appealed against [u/s 15T (2) of SEBI Act].
It must be noted that as per SEBI [also see 2007 Circular above], the proposed consent order must be submitted to a High Powered Committee to be headed by a former judge of a High Court. The recommendation of such committee is submitted to the Adjudicating Officer/ Competent authority for consideration of such consent order. In case a matter is already pending before a court/ tribunal, such court/ tribunal needs to accept the draft consent terms. Also, the final consent order must be published by way of a Press Release. [UK Sinha, earlier this year answered some of the objections to consent orders.]
It is noteworthy that in India, while the orders cannot be appealed against, the Courts and Tribunals are also reluctant to question the proposed consent orders. The same are generally accepted. Questions have also been raised about SEBI’s jurisdiction to recover the amounts due from consent orders.
It would be interesting to note that the SEC’s equivalent of consent orders, Settlement Schemes are also facing some daunting questions. In a recent case involving Citibank, Federal Judge Rakoff has questioned the $285m proposed settlement between SEC and Citibank over the latter’s misleading statements to the investors in selling them toxic assets. This was surprising, according to the judge because, (a) it was the third time that SEC brought a case against the Citibank; (b) the loss to the investors was in the tune of $700m; (c) the profit made by Citibank was in the range of $170-190m; (d) lack of admission of guilt. The judge has not accepted the settlement, and experts believe that SEC and the Citi group might have to increase the settlement amount to convince the judge of the fairness of the settlement. The judge had raised 9 questions, 3 of which are very pertinent to the entire basis of the settlement mechanism, as well as to the consent order system in India:
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1) Why should the Court impose a judgment in a case in which the S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?
2) Given the S.E.C.'s statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the S.E.C.'s charges are true? Is the interest even stronger when there is no parallel criminal case?
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6) The proposed judgment imposes injunctive relief against future violations. What does the S.E.C. do to maintain compliance?
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It is clear that despite being in use for years, the settlement mechanism is not without its own flaws. This might be an early warning signal for SEBI to consider changes into its consent order mechanism to maximize its utility, while being fair and reasonable at the same time. The questions that arose in the Citi judgment must be considered by SEBI.
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