Should the Securities and Exchange Commission (SEC) force corporate wrongdoers to admit to their wrongdoing?

When the SEC penalizes a company $100 million, does it make sense that they don’t charge executives of that company?

These and other issues were raised last month when the SEC settled a case against Computer Sciences Corporation (CSC).

To settle the case, the company agreed to pay $190 million.

But the company neither admitted nor denied the charges brought by the SEC.

A number of former high ranking executives also settled — but in settling their cases, they too neither admitted nor denied the charges.

Brian Rubin is a partner at Sutherland Asbill in Washington, D.C.

“It’s a big penalty — $190 million,” Rubin said in an interview with Corporate Crime Reporter last week. “They charged the CEO and some high ranking executives. One of the criticisms we hear about the SEC is that they don’t end up charging individuals. The SEC also ordered a compliance review. As part of the settlement, they are ordering the company to retain an ethics and compliance consultant to review their internal compliance program and accounting controls.”

How is the SEC admissions policy changing?

“Traditionally, cases were settled as neither admit nor deny,” Rubin said. That gave companies and individuals the ability to put forward a defense if there was subsequent civil litigation that there was no admission of wrongdoing even though they settled with the SEC.”

“For years, there have been questions raised as to whether that makes sense. If a company is paying $100 million, how can they really say they didn’t do anything wrong? Mary Jo White instituted the policy that in certain cases, they would have companies or individuals admit to the findings of the SEC.”

“In this case, it was done as a neither admit nor deny. There was some criticism in the press about that. I don’t know what the negotiations behind doors involved, but often the companies say that if they are forced to admit to violations, that could significantly affect their ability to exist as a company going forward, depending on what business line they are in.”

What have been the real on the ground changes in their admissions policy?

“It’s held up as a potential issue that our clients will have to deal with. It’s a real threat and something that you are always thinking about in the back of your mind. When you get down to the nuts and bolts, most firms end up analyzing the cases where there have been admissions and making arguments to the staff about why their situation is different from those other ones.”

Is there any shift in policy in terms of charging executives?

“There have been media reports that that is an important issue for some of the commissioners. Companies act through people. It has always been a real issue and it will continue to be a real issue. Former executives can never feel comfortable if they did something wrong or arguably did something wrong or the company did something wrong.”

Is there a formal SEC defense bar?

“There is an informal SEC enforcement alumni group,” Rubin says. “It has an email distribution list and meets regularly. There are some non SEC alum who are part of that group. The types of questions that get asked are — have you heard of this type of case? Have you worked with this staff attorney? It’s not a formal group so they don’t take any formal policy positions.”

“Any hot issue in the press is going to be discussed. And then we also discuss issues that haven’t made the press yet. Like — we have an investigation involving x, y and z. Are you seeing the same kind of case? That might not hit the press until there are a couple of cases about the issue.”

How many lawyers are there in that group and how often do they meet?

“My guess is there are probably 100 to 200 attorneys. In DC, we have lunches every couple of months or so at a different law firm.”

How has the SEC changed under Mary Jo White?

“In some respects, the SEC is tougher because she is a former U.S. Attorney. There are a number of former Assistant U.S. Attorneys there. They view things a bit differently. One way is the new admissions policy.”

“Also, they have recently started using a reverse proffer. Normally, a possible defendant or respondent comes in and says — this is my story, this is what happened — in an attempt to get some leniency from the staff.”

“The reverse proffer is after an investigation is over, the SEC in effect presents to the proposed defendants or respondents what would arguably be the opening statement in a case. This is the case that we have against you, here is the evidence, here are our theories. Given that, are you interested in settling?”

They can both happen at the same time — you can have both a proffer and a reverse proffer?

“Yes. It’s not meant to displace the proffer. It’s sort of the opposite of a proffer.”

Is that new under Mary Jo White?

“It’s new as far as I know.”

How does that change the dynamic?

“In the past, during a Wells call or a Wells notice situation, the staff says that we have preliminarily determined that there are violations of x, y and z. And the proposed defendant or respondent has the opportunity to put in a Wells submission — more or less a legal brief — arguing why they think the staff doesn’t have a good case or no case at all.”

“Here, the dynamics are flipped. The SEC is saying — we believe there are violations because of the following pieces of evidence, here is how we would present it, here is what it says and here is the legal theory.”

It gives the SEC a bit of an upper hand?

“It makes them come out more forcefully. Instead of saying — we have preliminarily determined there are violations, they are saying — here is the case.”

Other than the reverse proffer, how else is the SEC reflecting more of a prosecutorial posture?

“They are looking at the evidence somewhat differently, how the evidence would be presented to a jury or to a judge or to an administrative law judge. They bring more of a litigator’s perspective versus a regulator’s perspective.”

What kind of impact did Senator Elizabeth Warren’s critique of Mary Jo White have within the community?

“Everybody read it. It’s too early to tell. Some people thought it was framed too harshly and maybe unfairly. And she could have asked the same questions without saying she was disappointed.”

One issue that she raised was the question of waivers. On that issue, there is internal dissent within the SEC on waivers. What is the SEC’s current policy on waivers and how might it change?

“Under certain circumstances, if a company is sanctioned, they can be granted a waiver so that they can do certain public offerings to raise more funds. The SEC can grant waivers to well-known seasoned issuers found to have violated securities laws. The issue at the SEC is if a company is a ‘wrongdoer,’ does it make sense for the SEC to give them a waiver to allow them to get more public funding? Or should we instead say they are a bad company because they did wrong and therefore we shouldn’t give them the opportunity to go out into the marketplace? Traditionally, there wasn’t a very high burden to get the waiver. More recently at the SEC, there has been a discussion of those issues.”

Does the SEC defense bar perceive Mary Jo White as a tougher law enforcement official — tougher than those who preceded her?

“Yes. Day to day, they are being tougher in certain types of cases. At the end of the day, you are dealing with five commissioners. And as you said, there are different opinions.”

“For years, there has been criticism about whether the SEC is tough enough or not. It ebbs and flows depending on what is happening with the economy and what is happening with the types of cases they are bringing.”

“We are seeing more public dissent and more public discussion about some of these issues.”

A big percentage of corporate crime cases at the Justice Department result from the companies turning themselves in. Is it the same at the SEC?

“Backing up a bit, a few years ago FINRA instituted a new rule — 4530 — which requires self-reporting of significant violations. So, on the broker/dealer side, the dynamic has changed a lot.”

On the broker/dealer side, what was it and how has it changed?

“It was — you might get some credit for extraordinary cooperation. And now, the rule is somewhat complicated. But if there are significant violations, you are supposed to report them to FINRA. And then FINRA may or may not do an investigation. They may or may not give you credit for self-reporting.”

“On the SEC side, there is also a general policy that they will credit you for extraordinary cooperation, which includes self-reporting. But companies often do a calculus as to whether they think the SEC is going to find out about the issue. And if they think the SEC won’t find out about the issue, it doesn’t make sense to self-report. On the other hand, if they think the SEC will find out about the issue, it does make sense to self-report to try to get some credit. But there is always a question as to how much credit companies are reporting if they do self-report.”

There seems to be a similar dynamic on the Justice Department side. Ten years ago, defense counsel were leaning toward self-reporting. Now they seem to be leaning against. Is the same going on on the SEC side?

“Yes.”

Why has it shifted?

“I’m not sure it has shifted. There has always been a question as to how much credit one gets and whether it’s worth it to self-report. The thinking is — if I self-report an issue, it’s going to lead to an enforcement action.”

Should the SEC be more clear about the consequences of self-reporting?

“They have tried to be clear. But it always comes down to a case by case determination — to what degree did the firm investigate? To what degree did the firm disclose? It’s difficult for the SEC — other than through broad brush strokes to say — this is the way we are going to reward self-reporting or extraordinary cooperation.”

[For the complete q/a format Interview with Brian Rubin, see page 27 Corporate Crime Reporter 29(13), June 29, 2015, print edition only.]