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SEC Announces New Guidelines to Encourage Cooperation in Investigations, but Caution Is Advisable
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January 18, 2010
By Fiona Philip
Robert Khuzami, director of the Securities and Exchange Commission’s Division of Enforcement, in August 2009 announced a restructuring of the division and an initiative to create comprehensive guidelines on individual cooperation with the SEC. The guidelines were released on January 13, 2010.
The guidelines, intended to encourage more cooperation, are spelled out in the Division of Enforcement Manual. They provide:
 | Formal Written Cooperation Agreements: The Enforcement Division will agree to recommend to the SEC that a person or company receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.
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| Formal Written Deferred Prosecution Agreements: The SEC will agree to forego an enforcement action against a cooperator in exchange for both full and truthful information and compliance with express prohibitions and undertakings during a period of deferred prosecution.
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| Non-Prosecution Agreement: The SEC will agree not to pursue an enforcement action against a cooperator if the person or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings. However, the Manual states that a Non-Prosecution Agreement will not be appropriate in “virtually all cases” involving a person who previously has violated the securities laws.
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SEC’s Division of Enforcement, Enforcement Manual §6.2.4. 1/
Factors Considered
In evaluating whether to enter into an agreement with an individual cooperator, the SEC will consider four factors:
| 1. | The assistance provided by the person, including an analysis of whether the cooperation resulted in substantial assistance to the investigation, the timeliness of the cooperation and the quality of the information provided.
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| 2. | The importance of the underlying matter in which the person cooperated, including whether the SEC has made the subject matter of the investigation a priority, the types of securities violations involved and the danger to investors or others posed by the underlying violations, including the amount of harm caused and the number of persons or entities harmed.
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| 3. | The societal interest in ensuring the cooperator is held accountable for his or her misconduct, including the severity of the nature of the conduct, the level of responsibility that the person had for the conduct, and the degree to which the person attempted to remediate that harm.
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| 4. | The appropriateness of cooperation credit based upon the risk profile of the cooperator, which includes the person’s history of lawlessness, the degree to which the person accepted responsibility for his or her conduct and the risk that the person may commit additional securities violations. 2/
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In considering whether to enter into a similar agreement with a company or otherwise credit it for its cooperation, the SEC referred to the13 factors it had announced in its Seaboard Report in 2001. 3/
Those 13 factors include an analysis of the nature of the conduct involved and whether it resulted from a mistake or negligence or reckless or willful conduct; whether the conduct was systemic or the action of just a few employees; what type of harm resulted from the conduct and how many persons and entities were hurt; what steps the company took upon learning of the misconduct; whether the company committed to learn the truth of the conduct and took prompt and effective steps to remediate the problems that arose; and whether the company promptly informed the SEC about the problems.
Despite the enumeration of these factors for both individuals and companies, the Enforcement Division has left itself a lot of room to define adequate cooperation. Many questions remain unanswered. For example, how will the SEC define “substantial assistance” in determining whether to enter into an agreement with an individual? Will the SEC’s different regional offices weigh this and other factors consistently? Many of these same questions have existed since 2001 when the SEC issued the Seaboard principles and clearly will continue to exist for both individuals and companies into the foreseeable future.
Immunity Requests
The SEC also issued a policy statement in which it delegated authority to the Director of the Enforcement Division to submit requests for immunity for criminal prosecution to the Department of Justice for witnesses who have provided or have the potential to provide “substantial assistance” to an SEC investigation or related enforcement action. 4/ This change is designed to speed up the process for such requests, which previously could be made only by the SEC itself. However, potential witnesses should tread carefully here. This is not a free pass by any means. The SEC in almost all cases will require a proffer of a person’s expected testimony or significant and reliable evidence that a person will be able to provide substantial assistance to the SEC before the immunity request is made to the Department of Justice. 5/
Despite announcement of the new policies and implementation of the new tools, the Division may not see an appreciable difference in the level of cooperation from individuals and companies. The fact remains that the SEC has civil authority only. Criminal authority for securities law violations remains with the Department of Justice. As a result, a person or company entering into a Cooperation Agreement, a Deferred Prosecution Agreement or a Non-Prosecution Agreement with the SEC still may face criminal charges for the same conduct.
Absent immunity from criminal prosecution, a person or company will gain no real advantage by entering into a cooperation agreement with the SEC. In addition to potential criminal exposure, any admissions made under such an agreement will pose risks to the person or company in parallel or subsequent civil securities class action or other civil litigation cases. Moreover, such admissions may preclude a settlement with the SEC in which the person or company neither admits nor denies liability.
Caution should be exercised before concluding that these written agreements are the way to proceed. Besides the risks outlined above, the SEC will have the final say on any proposed deal. Any agreement negotiated with the staff of the Enforcement Division will be valid only when the SEC approves it. Individuals should not get ahead of themselves, despite the rush the staff may be in, to cooperate until such agreements are authorized by the SEC and a thorough review of any potential criminal exposure is completed.
With these new tools, a larger, re-organized staff, newly appointed specialized unit heads and the bigger budget that Congress has provided to the SEC for 2010, it is likely that the Enforcement Division will ramp up its prosecution of securities law violations in the coming months. 6/
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ENDNOTES
| 1/ | As part of the initiative, the SEC issued a revised version of its Enforcement Manual on January 13, 2010. The manual includes a new §6 that discusses cooperation procedures. The full text of the manual is at: sec.gov/divisions/enforce/
enforcementmanual.pdf. The full text of the announcement is at: sec.gov/news/press/
2010/2010-6.htm.
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| 2/ | Policy Statement Concerning Cooperation by Individuals in Its Investigations and Related Enforcement Actions, SEC Release No. 36-61340 (January 13, 2010).
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| 3/ | Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, SEC Release No. 44969 (October 23, 2001).
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| 4/ | Delegations of Authority to the Director of Its Division of Enforcement, SEC Release No. 34-61339 (January 13, 2010).
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| 5/ | Enforcement Manual §6.2.5 at p. 134.
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| 6/ | SEC Names New Specialized Unit Chiefs and Head of New Office of Market Intelligence, SEC Press Release No. 2010-5 (January 13, 2010) at www.sec.gov/news/
press/2010/2010-5.htm |
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