Until recently, individuals considering cooperating with an SEC investigation had a difficult time determining whether a tangible benefit would result from cooperation. Two releases issued by the SEC in the past month demonstrate how the SEC has begun to apply its Cooperation Initiative and give new insight into how the SEC evaluates and credits cooperation in determining sanctions against individuals. A comparison of the two executives involved shows that the SEC will reward cooperation at any stage of an investigation; however, those who provide early assistance, give detailed credible information, and, of course, have cleaner hands regarding the underlying conduct, can negotiate a better resolution.
In the first two years following the SEC’s announcement of the Cooperation Initiative, the SEC’s settlements reflecting cooperation credit involved companies, not individuals, and included deferred prosecution and non-prosecution agreements. The recent releases highlight the importance that the SEC places on its cooperation initiative for individuals as well as corporate entities. In a March 19, 2012 release, Robert Khuzami, the Director of the Enforcement Division at the SEC, explained the SEC’s view that first-hand evidence possessed by cooperators can enhance and expedite investigations. The SEC’s recent actions, according to Khuzami, demonstrate that the SEC “fully recognizes the value of cooperation in SEC investigations and will seek to reward such cooperation appropriately.”
Announcement of No Enforcement Action Against AXA Rosenberg Executive
On March 19, 2012, the SEC announced its first decision to credit an individual for cooperating in an investigation. In the release, the SEC announced that it would not be filing an enforcement action against an unnamed former senior executive at AXA Rosenberg based on his timely and fulsome cooperation. Importantly, the cooperating witness came forward soon after the investigation began. The SEC’s announcement makes clear that it appreciates cooperation even after they begin looking into potential violations and is not limiting the credit for cooperation to just whistleblowers.
AXA Rosenberg is a California-based institutional money manager that specializes in quantitative investment strategies. According to SEC statements, there was a material error in the computer program that the company used to manage client assets. This error affected more than 600 clients and cost those clients roughly $217 million in losses. With the help of a former senior executive, the SEC was able to bring two different enforcement actions against AXA Rosenberg and its chairman to recoup the full $217 million for investors and $27.5 million in additional penalties.
Factors the SEC Considered in Crediting the Cooperating Executive
The SEC’s March 19 release focuses on the factors that led it to credit the cooperating executive. The factors it cites are identified in the Commission’s Policy Statement Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions. Every situation is different, and the factors in this case are not exhaustive, but they are illustrative of the SEC’s considerations when deciding whether and how to credit cooperation.
Assistance Provided – The SEC found that the cooperating executive was forthcoming and truthful. He provided credible and detailed information that made the investigative process quicker and more efficient. Moreover, he had knowledge of difficult facts in the investigation, the use of quantitative investment models, which was of significant value to the SEC staff. The SEC recognized that his cooperation enabled them to conserve staff resources. Further, it noted the executive provided the assistance without conditions. The SEC said this enhanced his credibility.
Importance of Underlying Matter – The SEC noted that proper compliance policies and procedures in quantitative investment funds are a priority area in the SEC’s enforcement program. Since the concealed error cost investors $217 million, the SEC placed a great deal of importance on this investigation.
Accountability – The Commission does not want the Cooperation Initiative to be a path for culpable executives to avoid accountability for their actions. However, in the AXA Rosenberg matter, the cooperating executive had a “limited role in the events surrounding concealment” and he advocated that the error be referred to the CEO.
The Executive’s Profile – The SEC noted that the cooperating executive currently is not an associated person of any regulated entity, a fiduciary for others involving financial matters, or an officer or director of a public company. Further, the executive has no regulatory or disciplinary history, resigned from AXA Rosenberg, and retired from the investment advisory industry. Accordingly, he “is no longer in a position to commit future violations” of securities laws.
Settlement with former EVP at United Commercial Bank
Shortly after the AXA Rosenberg release, the SEC announced another agreement with a cooperating executive, John M. Cinderey. The SEC filed an action and obtained an injunction against Cinderey but did not allege any violations of the anti-fraud provisions and did not order a civil penalty. The SEC noted that the lack of a penalty was based, in part, on the fact that Cinderey had already paid a $40,000 fine in an action brought by the FDIC and, in part, on Cinderey’s cooperation in the SEC investigation.
Cinderey was an executive vice president at United Commercial Bank in San Diego who the SEC alleges took part in a scheme to mislead auditors about the bank’s financial position and to delay reporting the deteriorating conditions of the bank’s loan portfolio during the financial crisis in 2008 and 2009. As part of this effort, the SEC alleges that Cinderey altered memos prepared for the independent auditors to provide incomplete or misleading information and he circumvented the bank’s internal accounting controls. The SEC charged four other senior executives at the bank with securities fraud in October 2011 and litigation is ongoing against three of them.
Cinderey’s cooperation in the investigation earned him the settlement without fraud charges and without any monetary penalty. The SEC’s release regarding Cinderey did not contain an evaluation of the cooperation factors comparable to those in the AXA Rosenberg release and stated only that the settlement reflects “credit given to Cinderey . . . for his substantial assistance in the investigation and the fact that he has entered into a cooperation agreement to assist in an ongoing related enforcement action.” However, a review of the SEC’s complaint against Cinderey provides useful indicators of the distinctions in the two matters. On the one hand, Cinderey had been a key player in a scheme to circumvent accounting controls and falsify books and records at the bank including taking action, after discussions with his supervisors, to omit information and add misleading statements to memoranda provided to the bank’s auditors. On the other hand, as in the AXA Rosenberg matter, the underlying conduct alleged at United Commercial Bank involved an area of SEC priority, fraudulent conduct during the early part of the financial crisis. His “substantial” cooperation and agreement to assist in the litigation against others on this priority matter earned Cinderey leniency. But, Cinderey’s alleged conduct involved a greater participation in misconduct as compared to the AXA Rosenberg executive who objected to his firm’s plan to conceal a problem and who had a very minor role in the events in question. Consistent with the Commission’s desire to prevent the Cooperation Initiative from rewarding bad behavior and the need to hold individuals accountable, the terms of Cinderey’s settlement are not as generous.
The SEC is trying to publicize its Cooperation Initiative and is publicly crediting cooperating executives in hopes of incentivizing others to cooperate in future investigations. The AXA Rosenberg release is the first time that the Commission has provided some transparency into the factors and process for crediting individual cooperation. As evidenced by both the AXA Rosenberg release and the Cinderey action, the SEC will give leniency not just to whistleblowers who come forward before an investigation has begun but also to those whose assistance begins in the early stages of an investigation. The level of leniency will depend on various factors and likely will require the individual executive to be “the first one in the door” at the SEC. Executives considering cooperating with the SEC and seeking substantial credit for their assistance also should evaluate their role in any company misconduct, the priority of the investigation’s subject matter to the SEC’s enforcement program, the individual’s history of prior violations and current positions, as well as their willingness to be fully credible and freely give information over an extended period of an investigation and litigation.