01/15/2010 07:29:00 PM EST
A Game Changer for the SEC? The SEC Formally Embraces Cooperation for Individuals for the First Time
Kenneth Winer & Kimberly Shur, Foley & Lardner LLP
In a continued effort to reinvigorate and strengthen its enforcement program, the Securities and Exchange Commission has borrowed from the Department of Justice’s criminal process playbook and announced a series of new initiatives to encourage individuals to cooperate with the agency’s investigations and enforcement actions.[1] The new cooperation tools[2] include:
· Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.
· Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.
· Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.[3]
The SEC also formalized some additional related-cooperation incentives, including:
· Oral Assurances—Where the available evidence indicates that an individual or company has not violated the federal securities laws such as to warrant an enforcement action, Assistant Directors, with the approval of a supervisor at or above the level of Associate Director, may orally inform the individual or company that the Division does not anticipate recommending an enforcement action against the individual or company based upon the evidence currently known to the staff.[4]
· Settlement Recommendations—Even in the absence of a cooperation agreement, the staff may take into account an individual or company’s cooperation in connection with recommending sanctions or charges associated with the alleged misconduct and, under certain circumstances, forgoing enforcement actions against a cooperating individual or company.
· Cooperation Letters—Upon the written request of cooperating individuals and companies, supervisors at or above the level of Associate Director may submit letters describing the fact, manner and extent of assistance provided by such cooperating individuals and companies to the attention of courts, regulatory organizations, or law enforcement authorities. Requests for cooperation letters and copies of the letters sent by Commission staff should be retained by the senior officers who sign them.[5]
As SEC Enforcement Director Robert Khuzami has explained, these tools represent “a potential game-changer” for the agency:
There is no substitute for the insiders’ view into fraud and misconduct that only cooperating witnesses can provide. That type of evidence can expand our ability to conduct our investigations more swiftly, and to act quickly to file charges, freeze assets, and protect investors.[6]
While these new cooperation tools might encourage cooperation and thus strengthen the enforcement division’s ability to investigate and build cases, this is unchartered territory for the SEC and the SEC defense bar. These cooperation tools have yet to be tested in the SEC enforcement context and their effectiveness in achieving the Divisions’ goals remains unclear.[7] This article explores the many questions raised by these new measures and the obstacles that remain.
In an effort to provide guidance, the SEC outlined for the first time its general approach to the way in which it will evaluate whether, how much, and in what manner to credit cooperation by individuals.[8] The factors it will consider are:
(1) The assistance provided by the cooperating individual: This factor considers the value, nature, and timeliness of the individual’s cooperation and whether it substantially assisted the investigation;
(2) The importance of the underlying matter in which the individual cooperated: This factor assesses the type, age, duration and number of violations at issue and the attendant dangers presented to investors or others;
(3) The societal interest in ensuring the individual is held accountable for his or her misconduct: This factor considers the severity of the individual’s misconduct, the culpability of the individual, the efforts undertaken by the individual to remediate the harm and whether any sanctions have been imposed by other authorities; and
(4) The appropriateness of cooperation credit based upon the risk profile of the cooperating individual: This factor considers the individual’s history of lawfulness, the degree to which the individual has accepted responsibility for the misconduct at issue and opportunities for future violations.[9]
Although the guidelines summarized above represent a creative and bold effort to enhance the SEC’s enforcement program, they fail to explicitly answer a number of key questions. Whether the new tools actually will enhance the enforcement program will depend largely on how they are interpreted and implemented. Set forth below are some of the key questions that remain.
Who Will Be Eligible To Enter Into A Cooperation Agreement?
It is not entirely clear to whom these new cooperation agreements will be made available. Are the “cooperation agreements” available only to those individuals who provide “whistle-blowing” type information? In a whistleblower situation, where the Staff has only limited information regarding the alleged violation, how will the Staff assess whether a cooperation agreement is even appropriate in the first instance? What if an individual has information regarding significant misconduct at a corporation that is not of so-called societal interest? The new initiatives also strongly suggest that deferred prosecution and non-prosecution agreements will be available only in limited circumstances and that individuals associated with broker-dealers and investment advisors, officers and directors of public companies, and licensed professionals, such as accountants and lawyers will be afforded less leniency.[10]
What Type Of Cooperation Agreement, If Any, Will Be Available To An Individual Or Corporation Who Is Not The First To Come Forward With Information?
Will a latecomer be able to take advantage of these cooperation tools? Enforcement Director Khuzami has made numerous public statements emphasizing the importance of timeliness and early cooperation. He has made it clear that latecomers rarely will qualify for cooperation credit:
And for those thinking about cooperating, you should seriously consider contacting the SEC quickly, because the benefits of cooperation will be reserved for those whose assistance is both timely and necessary. Latecomers rarely will qualify for cooperation credit, so there is every reason to step forward – before someone else does – while you are in a position to benefit from your knowledge of wrongdoing.
How Much Weight Will The Commission Give To Cooperation and Cooperation Agreements?
The Commission is free not to respect a cooperation agreement negotiated by the Staff[11] and thus there is uncertainty as to whether the agreed upon deal will, in fact, be approved. How much weight will the Commission give to the Staff’s recommendations regarding the credit to be given for cooperation? How much weight will the Staff actually give to cooperation agreements in making recommendations? In the absence of a cooperation agreement, how much weight will the Staff give to an individual’s cooperation in formulating an enforcement recommendation (or decision not to recommend an enforcement action)?
What Are the Disclosure Obligations of Entering Into a Cooperation Agreement?
There also are questions regarding what the disclosure obligations are of a company that employs an individual who has entered into a cooperation agreement, a deferred prosecution agreement, or a non-prosecution agreement? Will cooperation agreements, deferred prosecution agreements, and non-prosecution agreements be matters of public record? How will the Commission decide whether to make these agreements public?[12]
What Impact, If Any, Will the Cooperation Agreements Have on Parallel Proceedings?
Even if the Commission rewards an individual for extraordinary cooperation, to what extent will the Department of Justice and other law enforcement agencies (e.g., the NASD, the PCAOB, state regulators and prosecutors) respect the Commission’s decision to reward such cooperation? Simultaneously with the SEC’s announcement regarding the new tools to encourage cooperation, the Commission amended its rules to delegate authority to the Director of the Enforcement (“Division”) to submit witness immunity order requests to the Department of Justice for witnesses who have provided or have the potential to provide substantial assistance in the Commission’s investigations and related enforcement actions.[13] What will be the ability of the SEC Staff to assist a would-be cooperator in obtaining use immunity from the Department of Justice? The SEC Enforcement Manual provides that, in order to qualify for a deferred prosecution agreement, an individual may have to “agree either to admit or not contest underlying facts that the Commission could assert to establish a violation of the federal securities laws.”[14] Under what circumstances, if any, does this mean that the would-be cooperator would have to admit to incriminating facts or agree not to contest those facts in other matters (e.g., enforcement actions by other regulators, private damage actions)?
How Much Weight, If Any, Will The Staff Give To Oral Assurances?
The Enforcement Manual authorizes oral assurances only when the investigative record is adequately developed. Accordingly, the Enforcement Manual provides that prior to providing an oral assurance, the Staff should preferably receive proffers from the potential cooperating individuals and companies or have sufficient information regarding the potential cooperators’ conduct and their ability to provide substantial assistance to the Commission’s investigations or related enforcement actions. The Manual requires that whenever the Staff provides oral assurances, the Staff should clearly inform the potential cooperating individual or company that the oral assurances are based upon the evidence currently known to the Staff, the Division’s enforcement recommendations may change if new evidence is subsequently discovered and that the Commission has final authority to accept or reject enforcement recommendations. How readily will the Division change its position after providing oral assurances and how readily will the Commission reject the Division’s enforcement recommendation?
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While the questions are numerous and the effectiveness of these new cooperation tools is not yet known, the initiative is significant. It has changed the playing field for both would-be cooperators and defense counsel and is clearly an innovative step towards helping the SEC achieve its enforcement goals.
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Kenneth Winer and Kimberly Shur are partners in the Washington, D.C. office of Foley & Lardner LLP. They represent entities and individuals in SEC investigations.
Ken Winer Phone: 202.672.5528
Kim Shur Phone: 202.945.6011
[1] See SEC Press Release No. 2010-6, “SEC Announces Initiative to Encourage Individuals and Companies to Cooperate and Assist in Investigations,” (January 13, 2010) available at http://sec.gov/news/press/2010/2010-6.htm.
[2] While the Commission historically could, in theory, reward a cooperating witness with forbearance of all charges for providing useful information, testimony or documents, or with the permission of the Attorney General, provide immunity from criminal prosecution, these options rarely have been used. See Securities and Exchange Commission Division of Enforcement, Enforcement Manual, Section 3.3.5.3.1, available at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf. Typically only corporations and other entities have received cooperation credit from the Commission and only in the context of the Seaboard Order. See SEC Release No. 44969, “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,” (October 23, 2001) available at http://www.sec.gov/litigation/investreport/34-44969.htm. See also Alex Lipman, “Dusting Off SEC Cooperation Rules for Individuals,” SecuritiesLaw360 (July 13, 2009) available at http://www.law360.com/articles/109341.
[4] The new initiative also codifies and sets forth guidelines on the use of proffer agreements, a related cooperation tool the Division has used for many years. A proffer agreement is a written agreement providing that any statements made by a person, on a specific date, may not be used against that individual in subsequent proceedings, except that the Commission may use statements made during the proffer session as a source of investigative leads or for impeachment or rebuttal purposes if the person testifies inconsistently in a subsequent proceeding. The Commission also may share the information provided by the proffering individual with the appropriate authorities in a prosecution for perjury, making a false statement and obstruction of justice. See id., § 6.2.1.
[5] See id., §§ 6.2.1, 6.2.2.
[6] See SEC Press Release No. 2010-6, “SEC Announces Initiative to Encourage Individuals and Companies to Cooperate and Assist in Investigations,” (January 13, 2010) available at http://sec.gov/news/press/2010/2010-6.htm.
[7] In contrast, the Justice Department long ago routinized its cooperation practice and procedures. As a result of the proliferation of cooperation arrangements in criminal investigations and prosecutions led by the Department of Justice, the Sentencing Commission has reported that from October 2008 through September 2009 nearly 26% of all sentences were imposed below the Guidelines range as a result of government-sponsored departures. See http://www.ussc.gov/sc_cases/USSC_2009_Quarter_Report_4th.pdf.
[10] See id. §§ 6.2.3, 6.2.4.
[12] See id. § 6.3 for a general discussion regarding the Commission’s decision to publicize the benefits of cooperation.
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A former branch chief in the SEC
Division of Enforcement, Kenneth Winer is a partner at Foley &
Lardner LLP. Mr. Winer represents individuals and entities in SEC
investigations and in internal investigation relating to potential violations
of the federal securities laws, and is co-author of Securities Enforcement:
Counseling and Defense (LexisNexis/Matthew Bender). View Mr. Winer's Martindale-Hubbell®
profile here.
Kimberly Shur is a partner with Foley &
Lardner LLP. Ms. Shur's diverse practice includes all types of complex civil
litigation, with a specialized focus on securities litigation and franchise and
distribution matters. View Ms. Shur's Martindale-Hubbell®
profile here.