“The Securities and Exchange Commission, which has been imposing tougher sanctions on defendants involved in the recent wave of corporate scandals, is considering adding even stronger terms to settlement agreements it strikes in the months ahead, according to SEC officials,” writes Deborah Solomon in today’s Wall Street Journal.

“As the agency pursues charges in several high-profile cases, SEC commissioners and staff want to make sure settlements include a degree of punishment serious enough to serve as a deterrent against future violations. The SEC is debating whether defendants should have to admit guilt as part of an agreement and is considering forcing defendants to pay all financial penalties out of their own pockets instead of being able to use insurance to cover some fines.”

“Signaling the change, recent settlements have included stiffer penalties such as bans against serving as a director or officer of a public company and prohibitions on tapping indemnification or insurance policies to cover certain fines imposed by the agency. SEC officials acknowledge the harsher sanctions will likely result in more litigation and fewer agreements as defendants balk at the stricter terms.”

“Fueling the discussions is a recent move by some companies and individuals to use insurance to pay for fines ordered by the agency. Of the 10 securities firms that recently settled a $1.4 billion Wall Street case in which they were charged with misleading investors with tainted research, four are planning to pursue insurance claims for a portion of the money the SEC ordered them to pay. And last week, Xerox Corp. said it would pay $19 million of the $22 million that six Xerox executives were ordered to pay because of an indemnification policy covering those officials.”

“SEC Chairman William Donaldson called indemnification, which protects officers and directors against disgorgement and fines, ‘bad public policy’ in a recent speech. Mr. Donaldson and other commissioners are concerned the policies allow those who engage in wrongdoing to escape stiff financial penalties while passing the costs on to shareholders, according to people familiar with the matter.”

“The agency is looking at whether it can further curtail the use of those policies through stricter terms in settlements, according to SEC officials. Since settling the Wall Street case in April, the SEC has included language in its agreements that prevents defendants from using insurance or indemnification for any civil fines. Now the agency is weighing whether to expand that ban to include disgorgement, which orders defendants to give back ill-gotten gains such as salary or stock. The SEC ordered disgorgement in both the Xerox and Wall Street settlements. Many insurance policies cover disgorgement as long as a defendant hasn’t admitted guilt or isn’t convicted of a crime. Most SEC settlements don’t require a defendant to admit or deny charges so the policies usually kick in.”

“The agency, however, is trying to tread carefully. While the commission wants to be seen as tough, it’s trying to balance that with the necessity of resolving most cases out of court. The SEC, which brought about 600 enforcement cases in 2002, lacks the resources to litigate every case and tries to settle most of them. An SEC spokesman said the enforcement staff’s objective is to get the same sanctions in a settlement that it could win in a court conviction.”