On Wednesday, June 8, 2011 the firm hosted for the ABA a panel discussion on Current Trends in DOJ and SEC Financial Fraud Enforcement. The panel, co-chaired by Dorsey partner Thomas Gorman and Frank Razzano of Pepper Hamilton included Lorin Reisner, Deputy Director, SEC Division of Enforcement; Patrick Stokes, Deputy Director, Fraud Section, DOJ; Stephen Gannon, V.P. and Deputy General Counsel, Capital One Financial Services.
The panel discussed DOJ and SEC enforcement efforts in the area of financial fraud, the work of the Financial Fraud Enforcement Task Force created by executive order from the President, the Virginia Fraud Task Force, the role of compliance, the SEC’s new whistleblower regulations and program, and the role of cooperation in resolving government investigations.
Key points by the panelists included:
- DOJ-SEC coordination: As a result of the task forces, there is increased coordination between the SEC, DOJ and other law enforcement agencies. The SEC and DOJ are conducting more parallel investigations. The SEC will not as a matter of policy tell those involved in its investigations if there is a parallel criminal inquiry. Between 50% and 60% of the SEC’s investigations have a parallel criminal inquiry. The existence of parallel investigations can, of course, significantly impact the approach of a company or person to cooperating with, or defending, an investigation.
- Whistleblowers and cooperation: The SEC has not determined how its recent cooperation initiatives dovetail with the new whistleblower program. Under the Commission’s cooperation initiatives, a person involved in wrongful conduct may cooperate with the SEC and avoid prosecution. At the same time that person could “blow the whistle” and obtain a significant bounty. Whether persons will be able to take advantage of both benefits is not yet clear.
- Whistleblower reports: The SEC considered but elected not to require that the whistleblower first report potential wrongdoing to the company. When a whistleblower reports first to the SEC, the agency may in some instances notify the company and permit it to investigate first. In others the agency may elect to conduct its own investigation. If the company is aware of the report before the SEC, it will have the opportunity to begin its own inquiry which may help in persuading the SEC to hold off on beginning an investigation. Accordingly, companies should consider taking appropriate steps to encourage internal reporting first.
- Compliance and financial fraud actions: The adequacy of company compliance systems and internal controls is a critical factor in evaluating the disposition of a financial fraud investigation for the SEC and DOJ. This puts a premium on having robust procedures and controls.
- The impact of Dodd-Frank: The Act puts a premium on having robust compliance systems and creating a culture built on ethical conduct which comes from the top of the organization. When coupled with the new SEC whistleblower regulations, the Act demands that companies have a plan in place that can be immediately implemented to deal with any possible whistleblower complaint.