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What to Do if You're the Deer in the SEC's Headlights



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Yesterday, Andrew Ceresney, Director, Division of Enforcement at the Securities and Exchange Commission (SEC) gave an interesting speech at the University of Texas School of Law’s Government Enforcement Institute in Dallas.

As regular readers know, in 2001, the SEC issued what has come to be known as the Seaboard Report, in which the SEC indentified four factors it considers in evaluating a company’s cooperation when determining what charges to bring and what remedies to seek:

  1. Self-policing;
  2. Self-reporting;
  3. Remediation; and
  4. Cooperation.

In your compliance programs, all four of those factors should be considered by your compliance staff and upper management when an impropriety is discovered.  Let’s talk today specifically about cooperation, which will always benefit your company if it is painted into the SEC corner.  According to Ceresney, there are three main benefits of cooperation for individuals, and the same advantages exist for corporations. 

First of all, individuals who find themselves in the SEC’s crosshairs may, by cooperating, not be charged at all.  According to Ceresney, that won’t work for senior management people who were engaged in “serious misconduct.”  However, “peripheral or lower-level” individuals might go free.  Even if the SEC feels that some charge has to be brought, cooperation can lead to reduced charges – such as what Ceresney calls “technical violations,” instead of charges based on intentional behavior.  The enforcement chief sites “…an analysis of our cooperation agreements, (showing) a significant percentage involved instances where (his division) declined to recommend charges,” even when the cooperating individuals might have had some legitimate criminal exposure. 

Second, Ceresney said that cooperation can lead to “…a significant reduction in monetary relief.”  According to the Enforcement Division’s history, cooperating individuals have paid no penalty at all in two-thirds of the cases.  There is also what is called disgorgement, in which the SEC seeks to compel people to “cough up” money or other assets that represent the “proceeds of wrongdoing.”  For cooperators, though, the SEC can show some flexibility on how to calculate the amount of money to be disgorged, taking a “narrower view of what should be disgorged in recognition of cooperation.” 

Third, cooperation can help the individual when the SEC analyzes the need for remedial relief, such as industry suspensions or bars.  Ceresney told the crowd that true cooperation relates directly to the factors that the SEC and courts have to look at when deciding whether remedial relief is necessary, such as a “…recognition of the wrongful nature of the conduct, and sincerity of assurances against further violations.” 

And if a person is worried about being debarred from future participation in the securities or banking industries, or in dealing with the Federal Government on future procurement contracts, just to list a few examples, cooperation “…can greatly influence how one assesses the degree of future risk to investors and the markets that is posed by the individual.”  In other words, one is less likely to be debarred if cooperation is taken into consideration. 

So, broken record time:  cooperation with investigating authorities is something that you and your lawyer always need to consider when the Government Wolf is at the door.

Below is a link to Andrew Ceresney’s full speech entitled “The SEC’s Cooperation Program: Reflections on Five Years of Experience.”