Archive for the ‘SEC’ Category

Enforcement Officials Speak On Compliance And Individual Accountability

Thursday, November 5th, 2015

SoapboxThis post summarizes two recent speeches by DOJ/SEC enforcement officials that touched upon topics relevant to Foreign Corrupt Practices Act enforcement.

In the first speech, Assistant Attorney General Leslie Caldwell, speaking at a financial industry event, focused her comments on compliance and the DOJ’s new compliance attorney position.

In the second speech, SEC Chair Mary Jo White talked about SEC enforcement strategies.

Caldwell’s Speech

As indicated above, Caldwell focused her comments on compliance and the DOJ’s new compliance attorney position.  For prior posts on these topics, see here and here including why the DOJ should be in favor of a compliance defense.  See also “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”

Caldwell stated in pertinent part:

Internal Compliance Officers Perform a Critical Function

[Compliance officers] are often the first line of defense against [legal violations]  Prosecutors cannot be everywhere, and by the time the Criminal Division gets involved, it’s usually too late to stop criminal activity.  Well before a grand jury subpoena is served or a witness is interviewed, compliance officers like you can and do step in and stop issues from becoming problems down the road.

As much as full-throated compliance programs are essential to preventing fraud and corruption, the quality and effectiveness of a compliance program is also an important factor that prosecutors consider in determining whether to bring charges against a business entity that has engaged in some form of criminal conduct.

In this after the fact review, the department looks closely at whether compliance programs are simply “paper programs,” or whether the institution and its culture actually support compliance.  We look at pre-existing programs, as well as what remedial measures a company took after discovering misconduct – including efforts to implement or improve a compliance program.

Criminal Division’s Compliance Counsel

Over the past twenty years or so, the very notion of “compliance” has been evolving rapidly.  Most companies, and maybe especially in the financial sector, have placed more and more emphasis on building strong compliance structures.  Programs have become more sophisticated and more industry and company-specific.

Companies increasingly have tailored compliance programs that make sense not just for their industries but also for their business lines, their risk factors, their geographic regions and the nature of their work force, to name a few.

Unfortunately, a surprising number of companies still lack rigorous compliance programs.  And even more companies have what appear to be good structures on paper, but fail in practice to devote adequate resources and management attention to compliance.

Still other companies fail to consider obvious risks, even in important parts of their businesses.  [...]

To be sure, it’s important for institutions to be mindful of regulatory priorities and guidance in devising and carrying out a tailored, risk-based compliance program.  But a narrow, cramped view of compliance – that it requires only adherence to specific regulations – ultimately will inure to the company’s detriment.  [...]

I believe that the Criminal Division has gotten much better at evaluating compliance programs over the years.  We understand that there is no “one size fits all” compliance program.  We understand that there are vast differences in the quality and effectiveness of programs, even among similar companies.   We have gotten better at suggesting tailored reforms to compliance programs when we resolve a corporate matter.

But we are prosecutors, not compliance professionals.  So, as you may be aware from press coverage, the Criminal Division has hired a compliance counsel to work in the Fraud Section.  While it’s too early to talk about specifics – her first day in the office is tomorrow – I can tell you generally what we’re thinking about.

We want to get the benefit of the expertise of someone with significant high-level compliance experience across a variety of industries, which this person has.  Our goal is to have someone who can provide what I’ll call a “reality check.”

First, the compliance counsel will help us assess a company’s program, as well as test the validity of its claims about its program, such as whether the compliance program truly is thoughtfully designed and sufficiently resourced to address the company’s compliance risks, or essentially window dressing.

Second, she will help guide Fraud Section prosecutors when they are seeking remedial compliance measures as part of a resolution with a company, whether by prosecution or otherwise.  We don’t want to impose unrealistic, unnecessary or unduly burdensome requirements on companies.  At the same time, we want to make sure that appropriate compliance enhancements are included when they are needed.

We understand that no compliance program is foolproof.  We also appreciate that the challenges of implementing an effective compliance program are compounded by the ever-increasing cross-border nature of business and of criminal activity.

Many [companies] operate all over the world.  They are creating products and delivering services not only here in the United States but overseas and are operating across many different legal regimes and cultures.

For this reason, we have chosen a compliance counsel who has the experience and expertise to examine a compliance program on a more global and a more granular level.

I want to correct one impression that has been expressed elsewhere.  Some have suggested that our retention of a compliance counsel is an indication that the department is moving toward recognizing or instituting a “compliance defense.”  That is not the case.

Rather, the Criminal Division will continue to review companies’ compliance programs as one of the many factors to be considered when deciding whether to criminally charge a company or how to resolve criminal charges.  Our hiring of a compliance counsel should be an indication to companies about just how seriously we take compliance.

Hallmarks of an Effective Compliance Program

You’re likely wondering what metrics this compliance counsel will use to assess a particular program.  And I’ll talk about that in a moment, but first I want to put your mind at ease about something.

The vast majority of compliance violations do not result in criminal prosecution.  Rather, the Criminal Division pursues charges when the offending conduct is intentional and particularly egregious or pervasive.

We’re not interested in prosecuting mistakes or accidents, or bad business judgments.  And we are not looking to prosecute compliance professionals.  To the contrary, we view you as the good guys and as our allies.  And we want to make sure that when we review a pre-existing compliance program, or suggest remedial measures, that we get it right.

So, what will the compliance counsel do?  She will help us evaluate each compliance program on a case-by-case basis – just as the department always has – but with a more expert eye, and she will work with our prosecutors to assess:

  • Does the institution ensure that its directors and senior managers provide strong, explicit and visible support for its corporate compliance policies?
  • Do the people who are responsible for compliance have stature within the company?  Do compliance teams get adequate funding and access to necessary resources?  Of course, we won’t expect that a smaller company has the same compliance resources as a Fortune-50 company.
  • Are the institution’s compliance policies clear and in writing?  Are they easily understood by employees?  Are the policies translated into languages spoken by the company’s employees?
  • Does the institution ensure that its compliance policies are effectively communicated to all employees?  Are its written policies easy for employees to find?  Do employees have repeated training, which should include direction regarding what to do or with whom to consult when issues arise?
  • Does the institution review its policies and practices to keep them up to date with evolving risks and circumstances?  This is especially important if a U.S.-based entity acquires or merges with another business, especially a foreign one.
  • Are there mechanisms to enforce compliance policies?  Those include both incentivizing good compliance and disciplining violations.  Is discipline even handed?  The department does not look favorably on situations in which low-level employees who may have engaged in misconduct are terminated, but the more senior people who either directed or deliberately turned a blind eye to the conduct suffer no consequences.  Such action sends the wrong message – to other employees, to the market and to the government – about the institution’s commitment to compliance.
  • Does the institution sensitize third parties like vendors, agents or consultants to the company’s expectation that its partners are also serious about compliance?  This means more than including boilerplate language in a contract.  It means taking action – including termination of a business relationship – if a partner demonstrates a lack of respect for laws and policies.  And that attitude toward partner compliance must exist regardless of geographic location.


These are just some of the elements of a strong compliance program.  When the Criminal Division evaluates a company’s compliance policy during an investigation, we look not only at how the policy reads on paper, but also at the messages conveyed to employees, including through in-person meetings, emails, telephone calls and compensation.  We look at whether, as a whole, a company tolerated compliance failures year after year because the alternative would have meant a reduction in revenues or profits.”

White’s Speech

Regarding individual prosecutions, White stated:

“Any discussion of strong enforcement tools must include a discussion of our priority of pursuing individuals.  Personal accountability, of course, is a basic tenet of law enforcement.  And individual accountability, particularly at the most senior levels, is a core part of our enforcement program because firms can only act through their people and it is people to whom we are trying to send our strong message of deterrence.  While some cases, because of the available evidence or charges, are appropriate to bring only against companies, we must always look to identify and charge those people who are responsible for their company’s wrongdoing.  In Fiscal Year 2015, about two-thirds of our substantive actions included charges against individuals.

Redress for wrongdoing can never be seen merely as a cost of doing business made good by cutting a corporate check.  When people fear for their own reputations, careers, or pocketbooks, they are more likely to stay in line.  So when investigating misconduct, our staff first looks at the individual conduct and works out to the entity, rather than starting with the entity as a whole and working in.

And when we do bring charges against individuals, we consider, in addition to tough charges and penalties, our remedies to prevent future wrongs as well.  One of our most potent tools is an order imposing a bar on an individual – a bar from, for example, working in the securities industry or serving on the board of a public company.  Such an order can reduce the likelihood that the defendant can defraud and victimize the public again.”

As detailed in this post, approximately 80% of corporate SEC FCPA enforcement actions since 2008 have not resulted in any related enforcement action against a company employee.

Friday Roundup

Friday, October 30th, 2015

Roundup2Scrutiny alerts and updates, civil litigation updates, SEC enforcement statistics, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates


The telecom and media company headquartered in Luxembourg with shares traded over the counter (OTC) in the U.S. recently disclosed:

“Millicom … announced that it has reported to law enforcement authorities in the United States and Sweden potential improper payments made on behalf of the company’s joint venture in Guatemala. A Special Committee of the Board of Directors made the decision in connection with an independent investigation being overseen by the Special Committee and conducted by international law firm Covington & Burling LLP, with the support of Millicom’s management team. Millicom is committed to fully cooperating with the authorities. It is not possible at this time to predict the matter’s likely duration or outcome. Millicom is committed to the highest ethical business standards and to full compliance with all applicable laws and regulations in every market in which the company operates.”


Speaking of FCPA scrutiny in Guatemala, according to this article in the Nation, Jaguar Energy Guatemala, a subsidiary of Houston-based AEI, “participated in an influence-trafficking scheme to obtain privileged information and favors from high-level Guatemalan officials. Among other things, the subsidiary is accused of paying to obtain meetings with the country’s former president Otto Pérez Molina.”

Goldman Sachs

The Wall Street Journal recently went in-depth regarding a Malaysian government investment fund,  1Malaysia Development Bhd., or 1MDB, and the role of Prime Minister Najib Razak. As noted in this article:

“[T]he fund has become the center of a political scandal that has engulfed Malaysia’s government. The fund is mired in debts of over $11 billion. It is a subject of a raft of local and international investigations, including, in Malaysia, by the central bank, auditor general, anticorruption agency and a parliament committee. It has faced accusations that billions of dollars are missing and that money was misused for political purposes or siphoned off in corruption by individuals.”

According to this article:

“Goldman Sachs Group Inc.’s role as adviser to a politically connected Malaysia development fund resulted in years of lucrative business. It also brought exposure to an expanding scandal. As part of a broad probe into allegations of money laundering and corruption investigators at the Federal Bureau of Investigation and the Justice Department have begun examining Goldman Sachs’s role in a series of transactions at 1Malaysia Development Bhd., people familiar with the matter said. The inquiries are at the information-gathering stage, and there is no suggestion of wrongdoing by the bank, the people said. Investigators “have yet to determine if the matter will become a focus of any investigations into the 1MDB scandal,” a spokeswoman for the FBI said.”


It was fairly obvious to knowledgeable observers that when the SEC brought an FCPA enforcement action against Bristol-Myers earlier this month (see here for the prior post), but the DOJ did not, that this signaled that there would not be a DOJ enforcement action as such parallel actions are almost always brought on the same day. Should there be any doubt, the company recently disclosed: “The Company has also been advised by the Department of Justice that it has closed its inquiry into this matter.”

Civil Litigation Updates

As highlighted in Foreign Corrupt Practices Act Ripples, settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall consequences that can result from FCPA scrutiny or enforcement. Among other things, FCPA scrutiny or enforcement often leads to private shareholder litigation as well as other civil claims such as wrongful termination by employees who allegedly “blew the whistle.”

Two developments from the FCPA-related civil dockets.

This recent post highlighted the civil lawsuit filed by Sanford Wadler, the former General Counsel and Secretary of Bio-Lab Laboratories, against the company and certain executive officers and board members in the aftermath of the company’s FCPA scrutiny and enforcement action. In his complaint, Wadler alleged various unfair employment practices. In this recent decision from the Northern District of California, the court largely denied the defendants’ motion to dismiss and allowed the bulk of Wadler’s claims to proceed.

It did not take long for the Ninth Circuit to affirm a lower court order dismissing derivative claims against H-P directors for, among other things, alleged breach of fiduciary duty in connection with the company’s FCPA scrutiny.  The court’s 4 page order is here.

SEC Enforcement Statistics

Although the SEC has a specialized FCPA Unit (one of only five specialized units at the SEC) and declared the FCPA to be a “vital part” of its overall enforcement program, the fact remains that FCPA enforcement is a relatively minor part of the SEC’s overall enforcement program.

Indeed, as noted in this recent SEC release:

“In the fiscal year that ended in September, the SEC filed 807 enforcement actions covering a wide range of misconduct, and obtained orders totaling approximately $4.2 billion in disgorgement and penalties.  Of the 807 enforcement actions filed in fiscal year 2015, a record 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.”

In the SEC’s FY 2015, there were 13 FCPA enforcement actions.

Nevertheless, the SEC’s release does mention:

Combating Foreign Corrupt Practices

Reading Stack

The most recent FCPA Update by Debevoise & Plimpton is here.

Miller & Chevalier’s Autumn FCPA Review is here.

An informative read here from Professor Peter Henning at his White Collar Crime Watch column in the New York Times titled “Reforming the SEC’s Administrative Process.”


A good weekend to all.

Chamber Of Commerce Recommends Changes To SEC Enforcement Practices

Thursday, July 16th, 2015

ChamberYesterday, the U.S. Chamber of Commerce Center for Capital Markets Competitiveness released this report titled “Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices.”

Based on a yearlong effort that included surveys and interviews of a diverse group of in-house counsels, securities lawyers, and former SEC staff, the report “looks at the enforcement practices of the Securities and Exchange Commission (SEC) and provides recommendations on how to improve the process for all participants.” (See here for the Chamber press release).

Other than a few survey responses, there is nothing in the report specific to the Foreign Corrupt Practices Act.  However, there is much in the report that is relevant to FCPA enforcement.

For instance, as highlighted in this 2014 FCPA year in review article, of the seven SEC corporate FCPA enforcement actions in 2014, six (86%) were resolved through SEC administrative orders.

Regarding the problematic surge in SEC administrative actions, the Chamber report states that “the fundamental problem in the use of an administrative forum to break new ground is the inherent risk of an unchecked expansion of existing legal policy that is not adequately overseen by a truly impartial third-party judicial forum.”

Against this backdrop, the report makes a number of recommendations relevant to SEC administrative actions that, at their core, propose “that the Commission adopt a policy to refrain from using its administrative forum as an avenue to adopt new interpretations of the federal securities laws or to apply existing interpretations to new or unique factual circumstances.”

Another recommendation in the report that caught my eye was the following: “The Commission should take a leadership role among regulatory bodies at the federal, state, and international levels to reduce or eliminate duplicative and overlapping investigations and duplicative enforcement actions for the same conduct.”

As stated in the report:

“When companies respond to allegations of improper activities, management’s focus is necessarily diverted from the day-to-day running of its business. That is an ineluctable attribute of doing business in a regulated society. But, there should be some understanding on government’s part that, in the current era, firms are frequently subject to multiple domestic and foreign regulators. Responding to multiple regulators with respect to the same conduct or transaction is not, and should not be allowed to become, a regular attribute of doing business. It is counterproductive—and damaging to shareholders—to subject firms and individuals serially to multiple SEC inquiries or multiple regulators and self regulators for the same alleged misconduct.”

A good place to eliminate duplicative regulation is to have the SEC stop enforcing the FCPA’s anti-bribery provisions.

As I’ve previously stated, should this reform occur, it could be called “granting the wish” because as highlighted in the article “The Story of the Foreign Corrupt Practices Act,” the SEC never wanted any role in enforcing the FCPA’s anti-bribery provisions. However, congressional leaders at the time of the FCPA’s enactment had a high level of distrust with the Justice Department and insisted, against the SEC’s objections both when the FCPA was enacted in 1977 and when it was first amended in 1988, that it play a role in enforcing the FCPA’s anti-bribery provisions.

For additional reading on divesting the SEC of its authority to enforce the FCPA’s anti-bribery provisions, see here from former DOJ FCPA enforcement attorney Philip Urofsky and here from Professor Barbara Black.




Tuesday, June 9th, 2015

PotpourriA mixture of various things worthy of highlighting.


Recently, former high-ranking SEC officials William McLucas and Matthew Martens took to the pages of the Wall Street Journal with this piece titled “How to Rein in the SEC.”

The authors stated as follows concerning the SEC’s recent preference of resolving enforcement actions internally through its own administrative process.

“The timing of the agency’s decision in late 2013 to move toward more in-house proceedings couldn’t have been worse. In the months surrounding the SEC’s shift, it suffered several high-profile defeats in federal court. In October 2013, the SEC lost the trial on its insider-trading charges against Mark Cuban, the owner of the Dallas Mavericks NBA franchise. A few months later, the SEC lost an accounting-fraud trial against the chief financial officer of a publicly traded company in Kansas. A number of other SEC actions against supposed inside traders were dismissed by federal courts or rejected by juries. (Disclosure: The authors participated on various sides of some of these matters.)

It was against this backdrop that the SEC publicly vowed to bring more cases as administrative proceedings. The agency contends that it was simply making use of new tools provided by the Dodd-Frank law, which authorized the SEC to charge virtually any offense in an administrative forum and to impose extraordinarily harsh financial penalties without the benefit of a jury. But the Dodd-Frank power to move more cases in-house was conferred in 2010 and lay largely unused until the agency’s 2013 announcement of its new plans to make greater use of that authority.

One need not be a conspiracy theorist to wonder whether at least part of the SEC’s rationale was to avoid the federal courts. In government as in comedy, timing is everything. And here the SEC’s timing raises serious questions about the agency’s move toward the in-house forum.”

Three cheers for this observation.

In my 2014 article “A Foreign Corrupt Practices Act Narrative,” I likewise observed as follows.

 ”The SEC’s response to [recent] judicial scrutiny [of SEC enforcement theories] has been, as strange as it may sound, to bypass the judicial system altogether when resolving many of its enforcement actions including in the FCPA context.”

As reported today by the Wall Street Journal:

“A federal judge ruled Monday that the Securities and Exchange Commission’s use of an in-house judge to preside over an insider-trading case was “likely unconstitutional,” a potential blow to the agency’s controversial use of its internal tribunal. The decision possibly creates a serious headache for the SEC, which is increasingly using its five administrative-law judges to hear its cases, rather than sending them to federal court, legal experts said. Although the ruling was preliminary, and won’t necessarily be duplicated in other federal courts, it could have ramifications for other SEC cases and potentially other federal agencies.”


AlixPartners recently released this “Combating Corporate Corruption” survey. Among the results that caught my eye.

“As much as 64% of our respondents said they believe there are places in the world where it’s impossible to do business without encountering corruption. When asked to identify such places, 62% cited Russia; 53%, Africa; and 46%, China. Still, a number of companies opted to do business in high-risk regions; specifically, 66% said they have not avoided doing business in a region because of the risk of corruption. Although battling corruption remains a priority, our findings suggest that many companies see an uneven playing field.

Among survey participants who are with organizations that have dedicated compliance programs, such programs are tailored to a variety of legal requirements (figure 3). For example, 73% said the program specifically addresses the US Foreign Corrupt Practices Act; 55%, the UK Bribery Act; and 44%, the US Office of Foreign Assets Control.”


“We asked respondents to take stock of their most-successful anticorruption programs and to cite what they see as the top factors in reducing corruption risk in their organizations. The most-important practices they identified were proper anticorruption training for employees (44%), compliance policies that specifically address corruption (42%), and internal audits (usually done on an annual basis) (39%) (figure 4). Only 21% cited expanding the scope of their audits for foreign subsidiaries, and just 11% mentioned the increased use of incentives.”

I am all for creative marketing teasers, but the below statement from the survey report is not true. (See here).

“Anticorruption enforcement remained active in 2014, with a sharp rise in enforcement actions taken by both the US Department of Justice and the US Securities and Exchange Commission against corporate defendants.”


Comparing enforcement of the FCPA with enforcement of FCPA-like laws around the world is not a valid comparison for the reasons highlighted in this article “Ten Seldom Discussed FCPA Facts That You Need to Know.”

There are other limitations as well.  As noted in the most recent version of Trace International’s Global Enforcement Report:

“The TRACE Compendium and the GER 2014 cannot provide a precise and objective measurement of global anti-corruption enforcement. Instead, they are meant to provide general information on trends in international anti-corruption efforts on a broad scale.”

Despite the many limitations, the GER does as good of job as any tracking global enforcement of FCPA-like laws.

Moreover, given my own focus on FCPA enforcement statistics and concern of the various creative counting methods used by others (see here for example), I particularly like the Introduction of the GER in which Trace articulates a similar “core” approach that I use in keeping my enforcement statistics.  The GER states:

“When a company and its employees or representatives face multiple enforcement actions involving substantially the same conduct, only one enforcement action is counted in the GER 2014. If a company does not face an enforcement action but its employees or representatives do, the enforcement action is counted as one enforcement action.”

Another Week And More SEC Speeches

Wednesday, May 20th, 2015

Speaking8SEC enforcement officials sure do make a lot of speeches.

Last week, it was Andrew Ceresney (Director of the Division of Enforcement) who delivered speeches in Texas and New York.

In this speech, Ceresney focused on the SEC’s “cooperation program” (announced in 2010 see here for the prior post) and how the SEC uses “cooperation agreements and other cooperation tools.”

According to Ceresney:

“My bottom line is twofold:  first, the cooperation program has succeeded in making the Commission’s enforcement program more effective by obtaining significant results which protect investors and deter misconduct; and second, those who are willing and able to help us can thereby help themselves in significant ways.”

Ceresney continued as follows.

“In laying out the range of options for considering and rewarding self-reporting and cooperation, the Commission noted that such credit could range from the “extraordinary” step of declining an enforcement action, to narrowing charges, limiting sanctions, or including mitigating or similar language in charging documents.  The Commission has used each of these approaches in its cases over the years.

To take one example of how this plays out in practice, look at our recent announcement of settled Foreign Corrupt Practices Act (FCPA) charges against FLIR Systems Inc.  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.”

Let’s pause for a moment to reflect on Ceresney’s suggestion that Goodyear uniquely benefited from receiving no civil penalty and FLIR Systems uniquely benefited because its civil penalty was “only $1 million” and his assertion that “penalties in FCPA settlements often are set at an amount equal to the disgorgement amount.”

For starters, between 2011 and 2014 the SEC resolved 36 corporate FCPA enforcement actions.  22 of the actions 61% did not involve any civil penalty in the settlement amount.  Of the 12 enforcement actions that involved disgorgement and a civil penalty amount (note Oracle and Ball Corp. involved only a civil penalty), in only the Allianz enforcement action did the civil penalty amount equal the disgorgement amount.  In every other situation (92%), the civil penalty amount did not equal (by a large margin) the disgorgement amount.

In short, Ceresney’s statement that “penalties in FCPA settlements often are set at an amount equal to the disgorgement amount” is simply false as evidenced in SEC FCPA enforcement actions between 2011-2014.

Ceresney next talked about self-reporting and cooperation and stated as follows.

“The discussion of whether and when to self-report is, I think, a bit more developed in the context of FCPA cases than in other types of cases.  As I have previously said, companies are gambling if they fail to self-report FCPA misconduct to us.  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.

As for the nature of cooperation, I think that the bar has been raised for what counts as good corporate citizenship in the last 15 years or so.  For example, internal investigations have now become common, a clear best practice for any company that discovers significant potential misconduct.  And sharing the results of those internal investigations with the government has become commonplace, as companies recognize the immense benefits that can accrue to them from doing so.  Some government officials have reemphasized recently the need for companies to share information on individual wrongdoers in order to receive credit for their cooperation.  I wholeheartedly agree, and this has long been a central tenet of cooperation with the SEC. When a company commits to cooperation and expects credit for that assistance, the Enforcement staff expects them to provide us with all relevant facts, including facts implicating senior officials and other individuals.  In short, when something goes wrong, we want to know who is responsible so that we can hold them accountable.  If a company helps us do that, they will benefit.”

Ceresney next spoke about the SEC’s use of NPAs and DPAs, part of the SEC’s cooperation program announced in 2010.

“Since the start of the cooperation program, the Commission has announced just five DPAs and five NPAs.  [Note: the SEC has used such agreements three times in the FCPA context:  Tenaris (DPA), Ralph Lauren (NPA) and PBSJ (DPA)]. While these types of agreements are a good option in some extraordinary cases, they have been a relatively limited part of our practice.  I think this is appropriate and should continue to be the case.

In contrast to the limited number of DPAs and NPAs, the Division of Enforcement has signed over 80 cooperation agreements over the last five years.  These cooperation agreements, and the benefits they have provided, are really at the heart of our cooperation program.

As I mentioned, cooperation agreements have long been a staple of criminal prosecutions.  The reason for this is simple:  to break open a case, you often need assistance from someone who participated in or knew of the misconduct.  These people can answer your questions, and they can lead you to ask the questions you hadn’t yet thought of.  They can also be strong witnesses in outlining the misconduct for a jury.  This is no less true in our civil cases than in criminal cases.  Given the complexity of so many cases in our docket, we have much to gain by enlisting those who can guide us during our investigation and who can then tell a fact finder what happened from an insider’s perspective or otherwise explain the contours of the misconduct with specificity.

Over the last five years, we have signed up cooperators in all manner of cases.”

Ceresney next turned to a question that he suspected was on the minds of many in the audience:

“[I]s 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.  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.


Second, a significant reduction in monetary relief is another potential benefit of cooperation.  In most cooperation cases, the Commission enters into bifurcated settlements.  This postpones the determination of any civil penalty until after the cooperation is complete, much like a deferred sentencing in the criminal realm.  What this means is that, if there is a trial or a hearing in which the cooperator takes the stand and testifies, that cooperation can be taken into account when setting any monetary penalty.  Again, the numbers bear out that cooperators receive significant benefits.  In cases where a cooperator has been charged and we have resolved the penalty question, two-thirds of the time the cooperator has paid no penalty at all.  For example, our bifurcated proceeding with our first testifying cooperator resulted in a termination with no civil penalty.



To be clear, this flexibility ordinarily does not extend to disgorgement, for reasons that I think should be obvious.  Where someone is in possession of what clearly are the proceeds of wrongdoing, the Commission typically seeks to disgorge it.  That said, in some cases there is flexibility as to how to calculate disgorgement, and the Enforcement staff might take a narrower view of what should be disgorged in recognition of cooperation.


Let me point out that the cooperation program also may have important implications not only for potential cooperators, but also for their attorneys.  The defense bar would benefit from heightened attention to the fact that our use of our cooperation tools has changed the calculus for individuals whose conduct is under investigation.  Among other things, counsel need to take seriously the challenges posed by representing multiple clients when one client is in a position to obtain significant benefits by cooperating.  This is especially true when one client’s cooperation might threaten another of a lawyer’s clients.  Additionally, counsel should keep in mind that, just as corporate cooperation credit is greatly enhanced by early self-reporting, the same is true with individuals.  The earlier that someone comes in to start a conversation about cooperation, the better it will be for the client, because early action allows us to achieve the efficiency, speed, and effectiveness that result in the highest amount of cooperation credit being given.  So, just as we have seen the bar raised in terms of corporate cooperation, I think we are seeing a similar evolution when it comes to individuals.”


In this speech, also last week, Ceresney talked about the SEC’s litigation program.  Among other things, he stated:

“Litigation and trials are among the most important work of the Commission’s Enforcement staff and we have dedicated the necessary resources to ensure that we have and will continue to have a strong record of success.


The cases that litigate are typically those where the evidence is less clear cut, the law is unsettled, the defendants have determined to spare no expense in attempting to clear their names, or, in many cases, all of the above.”

In the speech, Ceresney also elaborated on the factors the SEC recently released in determining whether to bring an enforcement action internally through its administrative process or in federal court.  (See here for the prior post).