In recent weeks, the SEC has taken two important measures that appear to advance its goal of encouraging cooperation by individuals and business organizations. First, Enforcement Director Robert Khuzami announced new standards that the Commission will use to evaluate the question of cooperation for individuals (see Hogan & Hartson Litigation Alert dated January 20, 2010). Then, on January 20, the SEC announced a settlement with General Re Corporation that provides concrete examples of conduct that earned the company cooperation credit (press release available at http://sec.gov/news/press/2010/2010-10.htm). The General Re factors, described more fully below, provide valuable guidance to those considering a decision on self-reporting and cooperation.
The General Re settlement represents the conclusion of a case based on different financial fraud schemes involving American International Group and Prudential Financial, Inc. See SEC v. General Re Corporation, Case No. 10 CV 458 (S.D.N.Y. Filed Jan. 20, 2010).
In the AIG scheme, senior officials in a foreign subsidiary of General Re are alleged to have entered into two sham reinsurance transactions that improperly allowed AIG to reverse a declining reserve trend and falsely report additions to both loss reserves and premiums written. In the Prudential scheme, General Re is alleged to have entered into a series of sham reinsurance contracts with Prudential’s property and casualty division from 1997 to 2002, which improperly recognized more than $200 million in revenue from 2000 to 2002. General Re received fees totaling $8.1 million for its role in the Prudential transaction.
Without admitting or denying the allegations in the complaint, General Re consented to a judgment (subject to court approval) enjoining it from aiding and abetting violations of the books-and-records and internal controls provisions (Sections 13(b)(2)(A) and 13(b)(2)(B)) of the Securities Exchange Act of 1934 and directing it to pay $12.2 million in disgorgement and prejudgment interest but no civil penalty.
In determining to accept General Re’s settlement offer, the SEC took General Re’s remediation efforts and cooperation into account. The factors the SEC considered include General Re’s having:
- Conducted a comprehensive, independent review of it operations at the outset of the government investigations;
- Shared the results of the review with the government;
- Provided substantial assistance in the government’s civil and criminal actions against the individuals who were allegedly involved in illegal conduct; and
- Implemented a series of internal corporate reforms designed to strengthen oversight of its operations. The reforms, which were agreed to in a non-prosecution agreement with the Department of Justice, include dissolving the subsidiary involved in the AIG transactions, appointing an independent director to the board of directors, forming a committee consisting of senior managers to review and approve complex transactions, requiring legal review of proposed finite or loss mitigation contracts and fortifying its internal audit functions and underwriting rules.
In the past, the Commission has not often elaborated on the particular corporate actions that were considered in awarding cooperation credit. Its articulation of the actions taken by General Re is no doubt intended to foster additional cooperation with investigations being conducted by the Division of Enforcement and to give corporate counsel concrete examples of remedial actions that will assist them in resolving such investigations.