Ceresney Weighs in on SEC Investigations Individuals on the Bubble and Declinations

Andrew Ceresney wants cooperation.

Ceresney is the enforcement chief at the Securities and Exchange Commission (SEC). And the more he can get corporations and individuals to cooperate with his staff, the better off the SEC will be.

secSpeaking at the University of Texas School of Law’s Government Enforcement Institute in Dallas, Texas today, Ceresney hammered away at the benefits of self-reporting and cooperation.

Ceresney gave two examples of corporate cooperation.

“Look at our recent announcement of settled Foreign Corrupt Practices Act (FCPA) charges against FLIR Systems Inc.,” Ceresney told the gathering. “As the order in that case noted, the company self-reported, cooperated, and undertook significant remedial efforts.  The settlement required the company to pay around $7.5 million in disgorgement, plus prejudgment interest, but a penalty of only $1 million, whereas penalties in FCPA settlements often are set at an amount equal to the disgorgement amount.”

“Similarly, the Commission filed an FCPA action against Goodyear Tire & Rubber Company earlier this year. The order in that case notes the company’s prompt self-reporting, remedial acts, cooperation, and disciplinary actions against employees. The settlement ordered disgorgement and prejudgment interest of over $16 million, but no penalty at all.  As you can see from those two examples, Seaboard continues to provide a framework under which entities can receive cooperation credit in settlements.”

Ceresney tried to beat back some increased chatter in the defense bar that increasingly, it doesn’t pay to self-report.

“Companies are gambling if they fail to self-report Foreign Corrupt Practices Act (FCPA) misconduct to us,” Ceresney said. “After all, given the success of the SEC’s whistleblower program, we may well hear about that conduct from another source. But self-reporting is advisable not just in the FCPA context.  Firms need to be giving additional consideration to it in other contexts as well.  This includes self-reporting by registered firms of misconduct by associated persons, for example, and misconduct by issuer employees.”

“Where Enforcement staff uncovers such misconduct ourselves, a natural question for us to ask is why the firm didn’t tell us about it.  Was it because the firm didn’t know of the misconduct?  If so, what does that say about the firm’s supervisory systems, compliance program, and other controls?  On the other hand, if the firm did know about it, and the misconduct was significant, why didn’t the firm report it to us?  There will be significant consequences in that scenario from the failure to self-report.”

Ceresney said that increasingly, the SEC will be using reverse proffers.

“When appropriate, we will invite counsel in for a meeting in which we share key documents and expected testimony that will implicate the defendant,” Ceresney said. “This is another practice that is well established among criminal prosecutors and FBI agents but historically has been used less frequently at the SEC.”

“Sometimes we might do a reverse proffer at a more advanced stage of an investigation in order to attempt to bring the investigation swiftly to a close on settlement terms that we deem favorable and appropriate.  But we also might do it much earlier in an investigation, in order to demonstrate to a witness why cooperation is worthwhile. Doing this early, and in some cases, even in advance of testimony, may pay dividends in the right cases. The staff can explain our working theory, show key documents, and share other evidence that we have developed. And we can then use the meeting to impress upon the individual that, even though it may be early in our investigation, there is strong evidence that will eventually support an enforcement action against them, and that there are others against whom they can provide evidence in order to lessen their plight.”

“Now, this is not appropriate for every case or every defendant.  But we have seen this approach get results.  It can help us get where we need to be much quicker.”

Ceresney said that major questions for defense counsel are —  Is cooperation worth it?  Does it provide significant enough benefits to make it worthwhile?  Particularly given some of the downsides, including the need to potentially testify against others, can it pay sufficient dividends to justify the sacrifice?  Of course, in the criminal realm, a reduction in sentence is a very significant benefit of cooperation and serves to incentivize cooperation.  Have we been able to offer benefits sufficient to incentivize cooperation on the civil side?

“My answer to that is a simple yes,” Ceresney said. “ Let me start by talking about the cooperation calculus for individuals.  Say that you represent someone who fits this profile:  they are caught up in an investigation where charges are likely, but there are others who are more culpable or are in a more senior role.  True, they can hunker down during the investigation and hope for the best.  But if they come forward and assist the investigative staff, they can be affirmatively helping themselves as well.  Our history over the last five years demonstrates that the benefits are real in terms of charging decisions, monetary relief, and bars.  Let me go through each of those categories of benefits.”

“First, charging decisions.  Usually if a defendant is at a certain level of seniority, has engaged in serious misconduct, and we have significant evidence, the staff is not going to be in a position to recommend against charges entirely.  But there are situations where an individual is on the bubble.  The person might be a somewhat peripheral or lower-level player, where charges are possible but where exercising prosecutorial discretion against bringing charges is also a valid option.  Or there may be situations where the evidence is less clear, and without cooperation we would have a hard time making a case against that individual or against others.  The staff may also consider whether the conduct is sufficient to justify an injunction or a cease-and-desist order – after all, if an individual’s conduct suggests they are not likely to break the law again, and if the individual accepts responsibility through cooperation, it weighs against that sort of relief.”

“The bottom line is that it is possible to convince the staff that forward-looking relief is not necessary based on your client’s conduct and risk profile, and this can happen when your client quickly and fully owns up to their conduct and tries to make it right by helping us in our investigation. Or, if we believe a charge is necessary, in the right case we may reflect your client’s cooperation in making a recommendation about which violations to charge – for example, a cooperator might avoid scienter-based charges.”

“For obvious reasons, the Commission does not normally announce instances where, in the exercise of discretion, it determines that no charges are appropriate. And unless that individual testifies, that exercise of discretion likely will not become public.  But I can tell you, based on an analysis of our cooperation agreements, that a significant percentage involved instances where the Division declined to recommend charges.”

“This does not mean the staff considered all of those cooperators to be blameless. In one case we were able to explain publicly, the individual was a former senior executive at a money manager whose computer code error resulted in over $200 million in client losses.  Among other considerations, the individual approached us early with an offer to cooperate, and his assistance enabled us to conduct an efficient investigation that led to charges against the firm and its co-founder.  Although the cooperator had played a limited role in concealment of the error, taking everything into account the Commission decided that it was appropriate not to charge him.”

The Commission made a similar decision in a case where our cooperator was a fund administrator for a hedge fund. This individual was instructed by the fund’s manager to transfer fund assets to the manager’s personal account, and he also provided monthly statements to investors that were inaccurate because of those transfers, among other things.  But this individual became uncomfortable with what he was being asked to do, so he resigned and brought his concerns to us along with documentary evidence to back them up.  On the strength of his cooperation, we quickly filed an emergency action that allowed us to freeze $6 million to use to compensate investors.  In that case, a DPA with the cooperator – our first with an individual – was appropriate because he came forward voluntarily and provided the cooperation that allowed the Commission to move swiftly to protect investor funds.”

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