Recent Ninth Circuit Decision Further Muddles Treatment of AWCs

September 14, 2012

by Robert Vaughan Cornish, Jr.

836705_wallstreetbroadway.jpgEntities and individuals subject to discipline or review by the SEC, CFTC or self-regulatory organizations such as FINRA or the NFA are sometimes faced with the classic Hobson's Choice of settling allegations of misconduct under what is called an "Acceptance Waiver & Consent" or AWC. Notwithstanding one's desire to settle such matters and the truth regarding such allegations, AWCs often recite the facts as they were originally pled or recited by the regulatory body in its original submission that commenced the proceedings. These AWCs tend to find their way into related civil litigation, whether in court, arbitration or before other administrative bodies, for a variety of purposes. AWCs have been submitted as evidence of prior conduct, knowledge of prior conduct or the proclivity to engage in similar conduct.

A recent decision by the United States Court of Appeals for the Ninth Circuit, United States v. Bailey, No. 11-50132 (9th Cir., August 27, 2012), addressed the admissibility of AWCs in criminal proceedings and determined that AWCs are not admissible to demonstrate intent and knowledge of wrongful conduct. In Bailey, the SEC sought to introduce an AWC concerning violations of federal securities laws as evidence of knowledge of the defendant's criminal conduct. The District Court below permitted the AWC to be admitted into evidence at the defendant's trial for criminal violations of federal securities laws. The defendant was convicted and subsequently appealed, arguing that the admission of the AWC was prejudicial. The Ninth Circuit agreed. Of particular importance was the Court's recitation as to why AWCs should generally not be admitted as evidence of knowledge of wrongful conduct:

A defendant may settle a case for a variety of reasons. He may have committed the conduct alleged in the complaint [upon which the AWC is based] or he may not have - but having settled the claim, there is no way to know. Admitting prior conduct charged but settled with no admission of liability is not probative of whether defendant committed the prior conduct, much less whether he committed the conduct in question. There is no logical relevancy to admitting this type of evidence.

This post continues after the jump.

Although Bailey involves criminal allegations, the case provides guidance for those who routinely handle civil litigation involving conduct addressed in AWCs. There may be, however, other fact-specific reasons that may compel the admission of AWCs into evidence in civil proceedings. For instance, the statements of an individual upon which the AWC is based may be introduced in related civil litigation for the purpose of impeaching that individual's subsequent, inconsistent testimony. In light of Bailey, litigants and counsel must continue to weigh the efficacy of agreeing to an AWC and may want to incorporate specific language that precludes the use of the AWC in other proceedings. Likewise, litigants who expect to rely on allegations in an AWC should carefully consider the reasoning of Bailey before proceeding.