SEC 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).